INTERNATIONAL FINACE MANAGEMENT

International finance management

International Financial Management

Introduction

Our client is facing Forex risk. Also known as, currency risk of a financial asset, it is the risk to a position on a currency against another on future changes in the exchange rate. Within forex risk, there may be three kind of exposure: translation, transaction or economic. The client is exposed to transaction exposure.

Discussion

Transaction exposure is one type of exposure that results from the possibility of encountering future gains or losses on the exchange of currency during a transaction. This type is very common in corporations that do business in foreign markets. An example of transaction exposure follows: an American corporation receives an order from a Japanese corporation for one hundred tons of rice. This certain transaction will receive payment in thirty days in Japanese currency (Stulz, 2005).

Due to fluctuations in the exchange rate, Yen to the Dollar, the corporation can either lose or gain money on that certain transaction. Transaction exposure can be incurred and steps must be taken to protect these transactions from possible fluctuations in the currency. Risk can be minimized by using different types of hedges. The most common are forward contracts, options, futures, and currency swaps. These hedges ensure the value of the currency without risk.

Hedging

Reduction of the variability of future earnings due to exchange rate risk is known as Hedging. The main advantage of hedging is that it improves planning, the benefit of management to shareholders, improves the ability to meet future obligations. The downside associated with it is that management of exchange rate risk involves costs, hedging beneficial reasons only accounting.

Payment

 

€ 6,250,000

in Dollars

129

$ 806,250,000

 

 

 

Cost

 

Call Option

3.93

$ 24,562,500

Put Option

1.58

$ 9,875,000

 

 

Cost of using Call Option $ 24,562,500

Cost of using Put Option $ 9,875,000

Options

Option is particular type of ...