Please pick one: 1. Why Hedge? Does foreign currency exchange hedging both reduc
ID: 397858 • Letter: P
Question
Please pick one:
1. Why Hedge? Does foreign currency exchange hedging both reduce risk and increase expected value? Explain, and list several arguments in favor of currency risk management and several against. Make sure you fully defend your response with your research / comments from the textbook, lecture and outside sources.
2. Do you believe translation exposure is relevant? The two methods for the translation of foreign subsidiary financial statements are the current rate and temporal methods. Briefly, describe how each of these methods translates the foreign subsidiary financial statements into the parent company's consolidated statements. Identify when each technique should be used and the major advantage(s) of each.
3. Is transaction exposure relevant? Should MNE hedge unanticipated transactions? Make sure you fully defend your response with your research / comments from the textbook, lecture and outside sources.
4. A British firm has a subsidiary in the U.S., and a U.S. firm, known to the British firm, has a subsidiary in Britain. Define and then provide an example for each of the following management techniques for reducing the firm's operating cash flows. The following are techniques to consider: a) matching currency cash flows b) risk-sharing agreements c) back-to-back or parallel loans
Explanation / Answer
1. the investor who made investments in financial assets or currencies do face the risk of down turns. when the investor face down turn risk in cash market, he entered into derivative market with opposite contracts. for example, if you purchase Euro for another currency say US $, but if the value of Euro is increasing, the the investor face risk.
The same investor enter into derivative market to by short selling the same, the loss can be covered through this process.
2. transactional exposure resulted in when the transactions were happened in foreign currencies. Translation exposure resulted when a firm denotes its assets, payment, etc in foreign currencies.
3. when the transactions were happened in foreign currencies, it resulted in transaction exposure. Yes, it is relevant and show impact on the capital and funds inflow and outflow.
4.