Assignment - International Financial Management
Assignment
International Financial Management
Table of Contents
1.0 Introduction
2.1 Purpose of hedging foreign exchange risk
2.2 Alternative hedging techniques
3.1 Calculations using forward contract
3.2 Calculations using money market
3.3 Calculations using billing in US dollar
4.1 Features of fixed contract
4.2 Features of options contract
5.0 Conclusion
References
1.0 Introduction
This report contains a brief understanding about the foreign exchange risk and the various techniques used for hedging against these risks which is very important for International Financial Management in the current market scenario. The problem stated in the assignment about a US firm which is due to receive 500mn Mexican Pesos in 6 months time is a real time situation provided to us. It gives us an opportunity to think as analysts, evaluate the situation, perform calculations and suggest the firm to take the most profitable hedging approach. It also gives an opportunity to understand and explain the various hedging techniques available in the market. Further study of the report makes us familiar with the features of fixed contracts and option contracts. Extracting information on these topics has been very informative and productive in terms of gaining knowledge.
2.1 Purpose of Hedging Foreign Exchange Risk Hedging is a technique for risk management, performed to safeguard foreign exchange vulnerabilities against the unpredictability of exchange rates. Hedging can be performed using techniques like Currency Futures, Forward Contracts, Currency Swaps, Money Markets, Currency Options, etc. by acquiring neutralizing positions against the underlying asset. To create stability between risk opportunity loss and uncertainty is a demanding act in hedging. Hedging is a risk in itself, and could be destructive if utilized inaccurately and with the desire of doing speculation. Hedging refers to a
International Financial Management
Table of Contents
1.0 Introduction
2.1 Purpose of hedging foreign exchange risk
2.2 Alternative hedging techniques
3.1 Calculations using forward contract
3.2 Calculations using money market
3.3 Calculations using billing in US dollar
4.1 Features of fixed contract
4.2 Features of options contract
5.0 Conclusion
References
1.0 Introduction
This report contains a brief understanding about the foreign exchange risk and the various techniques used for hedging against these risks which is very important for International Financial Management in the current market scenario. The problem stated in the assignment about a US firm which is due to receive 500mn Mexican Pesos in 6 months time is a real time situation provided to us. It gives us an opportunity to think as analysts, evaluate the situation, perform calculations and suggest the firm to take the most profitable hedging approach. It also gives an opportunity to understand and explain the various hedging techniques available in the market. Further study of the report makes us familiar with the features of fixed contracts and option contracts. Extracting information on these topics has been very informative and productive in terms of gaining knowledge.
2.1 Purpose of Hedging Foreign Exchange Risk Hedging is a technique for risk management, performed to safeguard foreign exchange vulnerabilities against the unpredictability of exchange rates. Hedging can be performed using techniques like Currency Futures, Forward Contracts, Currency Swaps, Money Markets, Currency Options, etc. by acquiring neutralizing positions against the underlying asset. To create stability between risk opportunity loss and uncertainty is a demanding act in hedging. Hedging is a risk in itself, and could be destructive if utilized inaccurately and with the desire of doing speculation. Hedging refers to a
References: Pandey, IM. (2010) Financial Management, 10th Edition, Vikas Publications. Fabozzi,F. (2003) Financial Management and Analysis, Second edition, Wiley.