Tutorial 7: Management of Economic Exposure QUESTIONS 1. How would you define economic exposure to exchange risk? Answer: Economic exposure can be defined as the possibility that the firm’s cash flows and thus its market value may be affected by the unexpected exchange rate changes. 2. Explain the following statement: “Exposure is the regression coefficient.” Answer: Exposure to currency risk can be appropriately measured by the sensitivity of the firm’s future cash flows and the
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be managed: - Natural Hedges - Cash Management - Adjusting of Intracompany accounts - International financing hedges and currency hedges through forward contracts‚ futures contracts‚ currency options and currency swaps NATURAL HEDGE - A hedge (risk reduction action) that occurs naturally as a result of a firm’s normal operations. For example‚ revenue received in a foreign currency and used to pay commitments in the same foreign currency would constitute a natural hedge. FOUR POSSIBLE SCENARIOS
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order to hedge its exposure? 8. Financial liabilities- Would it be more likely to be adversely affected by an increase or a decrease in interest rates? Should it purchase or sell interest rate futures contracts in order to hedge its exposure? 9. Why do some financial institutions remain exposed to interest rate risk‚ even when they believe that the use of interest rate futures could reduce their exposure? 10. Explain the difference between a long hedge and a short hedge used by financial
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December. State the contract that should be used for hedging when the expiration of the hedge is in a) June b) July c) January A good rule of thumb is to choose a futures contract that has a delivery month as close as possible to‚ but later than‚ the month containing the expiration of the hedge. The contracts that should be used are therefore a) July b) September c) March Problem 3.9. Does a perfect hedge always succeed in locking in the current spot price of an asset for a future transaction
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Summary of IAS 39: IAS 39: Financial Instruments: Recognition and Measure was first adopted by European Union for annual periods beginning on or after January 1st 2005. The goal was to provide principles for recognising and measuring financial assets‚ financial liabilities (including derivative financial instruments) and some specific contracts to buy and sell non-financial items. Initial Recognition: Financial asset or financial liability is only recognised on balance sheet when and only when
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What is GM’s foreign exchange hedging policy? GM’s foreign exchange hedging policy has three primary objectives. Its first objective is to reduce cash flow and earnings volatility. Specifically‚ management hedges the company’s transaction exposures and consciously ignores any balance sheet exposures (translation exposures). Second‚ GM aims to minimize the management time and costs dedicated to global FX management. The company employs a passive FX management strategy since an internal study
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love‚ relationship‚ wisdom or happiness could all be just an illusion. The way that people perceive things can be heavily influenced by many outside factors such as the media‚ entertainment‚ literature‚ and so on. In Empire of Illusion‚ the author Hedges uncovers the truth of how humans’ points of views about media‚ entertainment‚ love‚ relationship‚ and wisdom has been influence by the surrounding environment. He has shown the values of those aspects are being change by peoples’ point of view. Media
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forward hedge and a money-market hedge. The learning objectives of the case are as follows: • To explore the magnitude and effect of exchange-rate risks. • To illustrate exchange-rate risk management through two conventional hedges—a forward-contract hedge and a money-market hedge. • To demonstrate market parity and identify how preferences arise from unique company characteristics. • To explore issues related to pricing of international bids. Hedging Before exploring the two hedges‚ it
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Hedging in the Mining Industry Strategy‚ Control and Governance Contents Foreword Chapter 1: Executive summary Chapter 2: To hedge or not to hedge? Considering a strategy 1 2–4 5 – 12 Chapter 3: What tools are available? Implementing the hedging strategy 13 – 24 Chapter 4: How do we control and monitor a hedging programme? 25 – 36 Chapter 5: How‚ why and to whom do we communicate our risk-management strategy? 37 – 44 Chapter 6: What are the accounting implications? 45 – 49 Appendix
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Accounting for Derivative Instruments Page 1 of 22 Appendix 17A Accounting for Derivative Instruments Until the early 1970s‚ most financial managers worked in a cozy‚ if unthrilling‚ world. Since then‚ constant change caused by volatile markets‚ new technology‚ and deregulation has increased the risks to businesses. In response‚ the financial community developed products to manage these risks. These products—called derivative financial instruments or simply‚ derivatives—are useful for managing
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