F/X Exposure - PowerPoint PPT Presentation

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F/X Exposure

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Title: F/X Exposure Author: Ken Sublett Last modified by: WalterJ. Ferrier Created Date: 5/28/1995 4:35:30 PM Document presentation format: On-screen Show – PowerPoint PPT presentation

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Title: F/X Exposure


1
More Winter ahead
2
Trade, FDI, and the Economy
Cash
T-bills, assets
  • U.S. trade deficit offset by capital surplus
  • U.S. attracts FDI reduces U.S. imports

3
Foreign Currency
  • What is it?
  • Why does it change?
  • Risk for international managers
  • How to manage risk

4
Linkage Between Currencies
World Market for Euros
World Market for Dollars
Price /
Price /
S
S
.77 /
1.30 /
D
D
Same marketdifferent perspective.
5
Trade, FDI, and the Economy
Computers
Cash
  • Increase demand for Japanese computers trade
    deficit
  • Increase demand for computer inputs (components,
    labor, etc.) inflationary
  • Increase demand for Yen appreciates
  • Stronger Yen increases U.S. prices decreases
    demand for Japanese computers

6
German Market for BMWs
S
Price in Euros
100,000
D
7
Global Market for BMWsAmericans want to import
BMWs
S
Price in Euros
110,000
100,000
D
D
8
World Market for Euros
S
Price in Dollars
0.77 /
D
9
World Market for D-MarksAmericans need to
convert Dollars to Euros
Price /
S
0.74 /
0.77 /
D
D
10
Linkage Between Currencies
World Market for Euros
World Market for Dollars
Price /
Price /
S
S
0.77/
1.30/
D
D
11
Linkage Between Currencies
World Market for Euros
World Market for Dollars
Price /
Price /
S
S
S
0.74/
1.30/
0.77/
1.35/
D
D
D
12
Other Forces Causing Change
  • Foreign Direct Investment
  • Foreign Portfolio Investment
  • MNCs
  • Government Debt Instruments
  • Currency Arbitrage and Speculation
  • Governmental Intervention
  • Official and Unofficial pegs
  • International Agreements (e.g., G-7, the Euro)
  • Posturing (e.g., talking the dollar down)

13
Index of Swiss Franc vs. Dollar1990 100
2000
1990
1980
14
Depreciating Peso
15
The Big Mac Index
www.economist.com
16
Short-term F/X Management
  • Currency Hedges
  • Forward Contracts
  • Options
  • Negotiation of Ratcheted Pricing Schedule
  • Adjustment of Prices and Target Profits
  • Lower foreign prices to keep market share when
    home currency appreciates lowers profit margin
  • Raise foreign prices to keep profit margins when
    home currency depreciates less price
    competitive

17
Today US Dealer to Import BMWs
  • Sales Contract
  • Quantity 100 BMW 750s
  • Price 100,000 each
  • Payment Due in 3 months
  • Value of Sales Contract
  • 10.0 million
  • Spot Rate 1.30 /
  • 13.0 million

18
In Three Months Payment is DueUncovered
Transaction
  • Euro appreciates
  • New spot rate 1.35 /
  • 10.0 million
  • Adjusted Value of Sales Contract
  • Risk penalty 0.05 per traded
  • 13.5 million
  • US Dealers Loss 500,000

19
Today US Dealer to Import BMWsHedged Transaction
  • Sales Contract
  • Quantity 100 BMW 535s
  • Price 100,000 each
  • Payment Due in 3 months
  • Value of Sales Contract
  • 10 million
  • at 90-day Forward Rate 1.305 /
  • Insurance premium 0.005 per traded
  • 13.05 million

20
In Three Months Payment is Due Hedged
Transaction
  • Euro appreciates
  • New spot rate 1.35 / (Doesnt matter!!!)
  • 10 million
  • Adjusted Value of Sales Contract
  • Locked-in Forward Rate 1.305 /
  • 13.05 million
  • Cost of Hedge (insurance premium) 50,000

21
In Three Months Payment is Due Hedged
Transaction
  • Euro Depreciates
  • New spot rate 1.25 /
  • 10 million
  • Adjusted Value of Sales Contract
  • Locked-in Forward Rate 1.305 / (Spot
    better!!)
  • 12.5 million
  • Currency Windfall - Cost of Hedge 450,000

22
Medium-Term F/X Management
  • Balance sheet hedge
  • Match foreign assets with same level of foreign
    liabilities in same currency
  • Cash flow hedge
  • Match foreign A/P with A/R in same currency

23
Long-Term F/X Management
  • Shift sourcing and procurement
  • Shift production
  • Cut costs / improve productivity
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