chapter 8 (1)

Question 1

Three types of exposure

Answer 1

Transaction exposure

Economic exposure

translation exposure

Question 2

Transaction exposure

Answer 2

The sensitivity of realized domestic currency values of the firms contractual cash flows denoinated in foreign currencies to unexpected exchange rate changes

Question 3

Economic exposure

Answer 3

the extent to which the value of the firm would be affected by unanticipated changes in exchange rates. Any anticipated changes in exchange rates would have been already discounted and reflected in the firms value

Question 4

Trnslation exposure

Answer 4

refers to the potential that the firms consolidated financial statements can be affected by changes in exchange rates

Question 5

ways of hedging transaction exposure using various financial contracts and operational techniques

Answer 5

Financial contracts
Forward market hedge
Moneymarket hedge
option market hedge
Swap market hedge

Operational techniques:
Choice of the invoice currency

Lead/lag strategy

Exposure netting

Question 6

currency forward contracts explained

Answer 6

Generally speaking, the firm may sell (buy) its foreign currency receivables forward to eliminate its exchange risk exposure.

Question 7

Gain/losses forward hedging formula

Answer 7

Gain = (F - St) * amount

Question 8

Money market hedge

Answer 8

Generally speaking, the firm may borrow (lend) in foreign currency to hedge its foreign currency receivables (payables), thereby matching its assets and liabilities in the same currency

Question 9

cross hedging

Answer 9

involves hedging a position in one asset by taking a position in another asset

Question 10

contingent exposure

Answer 10

Contingent exposure refers to a situation in which the firm may or may not be subject to exchange exposure