...MANAGING F OREIGN E XCHANGE R ISK WITH DERIVATIVES by Gregory W. Brown* The University of North Carolina at Chapel Hill May, 2000 Version 3.4 Abstract This study investigates the foreign exchange risk management program of HDG Inc. (pseudonym), an industry leading manufacturer of durable equipment with sales in more than 50 countries. The analysis relies primarily on a three month field study in the treasury of HDG. Precise examination of factors affecting why and how the firm manages its foreign exchange exposure are explored through the use of internal firm documents, discussions with managers, and data on 3110 foreign-exchange derivative transactions over a three and a half year period. Results indicate that several commonly cited reasons for corporate hedging are probably not the primary motivation for why HDG undertakes a risk management program. Instead, informational asymmetries, facilitation of internal contracting, and competitive pricing concerns seem to motivate hedging. How HDG hedges depends on accounting treatment, derivative market liquidity, foreign exchange volatility, exposure volatility, technical factors, and recent hedging outcomes. * Department of Finance, Kenan-Flagler Business School, The University of North Carolina at Chapel Hill, CB 3490 – McColl Building, Chapel Hill, NC 27599-3490. Voice: (919) 962-9250, Fax: (919) 962-2068, Email: gregwbrown@unc.edu. A more recent version of this document may be available from my web page: http://itr.bschool...
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...Mitigating Exchange Rate Risk FIN /370 Aug 12,2013 Mitigating Exchange Risk MSMEs are exposed to many forms of risk in their course of business, such as interest rate risk, foreign exchange risk, and natural disasters. These could result in financial loss and minimize their profit. Since MSMEs work on tighter budgets than larger firms, and have weaker capital base, losses through exposure to various risks can result in more severe impact on profits and operating efficiencies for MSMEs than for large firms. (Export) Foreign exchange risk in particular, impacts firms engaged in exporting, importing, and borrowing in foreign currency. Rupee appreciation benefits importers as it decreases rupee prices of imported goods and harms exporters as it increases foreign currency prices of exported goods. Rupee depreciation harms borrowers who take loans in foreign currencies that are cheaper than Indian loans. (Export) Since currency fluctuations adversely impact MSMEs, they should determine their risk exposure to various currencies, as well as adopt risk mitigation strategies and methods. • (Export)The currencies to which the firm is exposed to • The extent of sales / purchases /receivables / payables denominated in foreign currencies • The extent to which price fluctuations can be passed on to customers (by increasing price or by entering price variance clauses) • Cash flow position of the firm and ability to withstand...
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...The Risk that are Involved in Foreign Exchange Market FIN-571 January 14, 2017 Kevin Suber The Risk that are Involved in Foreign Exchange Market In a foreign market trade investors can purchase stock in the international market exchange. Investors buy into the foreign exchange market, because it makes the investor make valuable profits quicker in a good economy. For most investors this would seem to be too good of a deal to pass up however, there can be some risk involved investing in a foreign market. In this paper I will be discussing the types of risk involved in the market. Here are a few type of risk an investor could potential be hit with in a foreign exchange market. The foreign exchange risk include, exchange rate risk, interest rate risk, and country and liquidity risk just to name a few of the major risk. For investors it is important to understand the risks in the foreign market trade. The big risk like exchange rate risk can be damaging to an investor portfolio because it is based on the market perception. The exchange rate risk also factors a largely unregulated Forex off-exchange trading. Another risk involved in the foreign market is the interest rate risk. The interest rate risk by fluctuating in the forward speeds and forward mismatch of in maturity gaps in the transaction of the foreign exchange. To include with the following risk would be the country and liquidity risk in the foreign market. The investor does risk the potential of a country or liquidity...
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...The term “foreign exchange” basically refers to buying the currency of one country while selling the currency of another country. All nations have their own, different kinds of money (currency). This has existed throughout the ages, probably since the time of the Babylonians. As trading developed between nations, the need to convert one kind of money to another also developed. This is how a formal system of foreign exchange arose. As trade between nations developed, Britain, as the nation with the largest and strongest navy, could spread its commercial interests far and wide. It therefore became the most active trading nation, with a vast empire of colonies. As a result, Britain’s currency, the pound sterling, became a benchmark to which other currencies were compared (and exchanged) for most of the seventeenth, eighteenth and nineteenth centuries. Today, most currencies are compared to the U.S. Dollar, currently the most active and commercially strong trading nation; many currencies are still “pegged” to the U.S. Dollar for their exchange rate. Because FX risks can be identified, they can be managed. Foreign exchange management requires that governments, companies, and individuals understand the factors that influence the valuation of currency. By identifying these factors, they can enter into transactions that mitigate the risks to acceptable levels. These transactions, or hedge positions, are designed to maximize the economic benefit of foreign exchange receipts, and payments...
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...Factors that Contribute to Exchange Rate Risk FIN/370 Factors that Contribute to Exchange Rate Risk There is a factor of exchange rate risk that needs to be considered if Kudler Fine Foods chooses to expand internationally. Exchange rate risk is the risk associated with fluctuations in the prices of foreign monies. There are six factors that contribute to exchange rate risk, inflation, interest rates, current account deficits, public debt, terms of trade, and political stability and economic performance. All of these factors need to be considered when deciding to expand into another country. Things like political stability and the economic performance of a country can make a difference in exchange rates and the ability to obtain forward contracts. Without the ability to obtain forward contracts, there is a risk of losing money to an extreme change in the country’s currency. Other factors that need to be considered when looking at a country is its inflation rate, is it extremely high or low. A lower inflation rate means that the country’s currency has an increasing value. Interest rates are another important point to look at as there is a correlation between inflation and exchange rate. Interest rates can be manipulated and higher interest rates offer lenders higher returns attracting foreign investment. The current-account or balance of trade between countries can be in excess demand or a deficit. More money is spent on foreign trade when there is a deficit...
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...17. If the spot rate of the Malaysian ringgit is $.30 and the six month forward rate of the ringgit is $.32, what is the forward premium or discount on an annual basis? A. premium; about 14.5% B. discount; about 14.5% * C. premium; about 13.3% D. discount; about 13.3% E. premium; about 16.7% Solution: use Equation (5-4) [(.32 - .30)/.30] x (360/180) = 13.3% 18. If the spot rate of the Israel shekel is $.32 and the six month forward rate is $.30, what is the forward premium or discount on an annual basis? A. discount; 11.5% B. premium; 11.5% C. premium; 12.5% * D. discount; 12.5% E. premium; 22.5% Solution: use Equation (5-4) [(.30 - .32)/.32] x (360/180) = -12.5% 19. If the Canadian dollar is equal to $.86 and the Brazilian real is equal to $.28, what is the value of the Brazilian real in terms of Canadian dollars? * A. about .3256 reals B. about .3568 reals C. about 1.2 reals D. about 1.5 reals E. about .5600 reals Solution: cross rate .28/.86 = .3256 20. If the Japanese yen was worth $.0035 six months ago and is worth $.0045 today, how much has the yen appreciated or depreciated? * A. appreciated; about 29% B. appreciated; about 25% C. depreciated; about 20% D. depreciated; about 18% E. appreciated; about 15% Solution: use Equation (5-1) (.0045 - .0035)/.0035 = 29% 21. Assume: (1) the US annual interest...
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...Minimal ANN (MANN) model for Data Classification Gunanidhi Pradhan, Bhubanananda Orissa School of Engineering, Cuttack gunanidhi_p@rediffmail.com Gadde Vyshnavi Kalyan,Final Yr IT,ANITS vyshv.sanjana@gmail.com Suresh Chandra Satapathy, MIEEE, Anil Neerukonda Institute of Technology & Sciences (ANITS), Vishakapatnam Dist sureshsatapathy@ieee.org Bhabatosh Mitra,FM University, Balasore bhaba_mit@yahoo.co.uk Sabyasachi Pattnaik,,FM University, Balasore spattnaik40@yahoo.co.in Abstract- Data Classification is a prime task in Data mining. Accurate and simple data classification task can help the clustering of large dataset appropriately. In this paper we have experimented and suggested a simple ANN based classification models called as Minimal ANN ( MANN) for different classification problems. The GA is used for optimally finding out the number of neurons in the single hidden layered model. Further, the model is trained with Back Propagation (BP) algorithm and GA (Genetic Algorithm) and classification accuracies are compared. It is revealed from the simulation that our suggested model can be a very good candidate for many applications as these are simple with good performances. Keywords- ANN, Genetic Algorithm, Data classification I. INTRODUCTION Data classification is a classical problem extensively studied by statisticians and machine learning researchers. It is an important problem in variety of engineering and scientific disciplines such as biology, psychology, medicines, marketing...
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...Bernie Madoff was born on April 29, 1938, in Queens, New York, Bernard was born to polish immigrants, work for many years as a plumber. Bernie married Sylvia his wife they had one daughter, son. Bernie had hard times during the Great depression so in 1950 he got involved in finance. Ponzi scheme The unethical research behavior was involved was the hedge funds scheme were he would have to sell or liquidate holding from one hedge funds to keep down pressure on the stock prices. When doing this it will keep the negative pressure off the stock exchange. Berine had celebrity connections from Kyra Sedwick, Kevin Bacon, Tom hanks, and many more people that invested in the hedge funds at first they were getting returns back at 10% return. The company was growing and he was hiring more family members. The person that was hurt by this scheme was his family, friend, and the people that he told he lost 50 million dollars in the stock exchange. His own son turner he in after his father was giving out 12 million bonuses. When asked where the money did come from “Madoff then admitted that a branch of his firm was actually an elaborate Ponzi scheme”. His son turned him in the next day to the federal authorizes. People have the loss of...
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...the objectives of both parties in the exchanges? Marilyn and Len are both looking out for their teams, and protecting their own best interests. Marilyn’s objective is to get Len to turnover five billion dollars worth of viable accounts. Len’s objective is to get Marilyn to accept the accounts he has chosen to give her, so that his team won’t incur a loss of commission. How would you describe the general "tone" of the exchanges? I would describe the general tone as a negative emotional tone in the first exchange. In the second exchange, the tone shifts from a negative to a more positive tone, as the negotiation evolves. In the end it appears that Marilyn changes the tone of the negotiations. Part B: Were Marilyn's objectives achieved in the first exchange? Not really. Marilyn stated her position expecting to maximize her resources and share of value, but failed to make her needs or interests known. Seeking to make the best possible case for his or her preferred perspective, Marilyn should have assembled some facts, or other evidence to persuade Len of the validity for her perspective. Arguments and frames began to shift, as the parties focused on refuting the other’s case. I believe, Marilyn’s argument suffered because of a lack of frame control. She failed to test different frames to determine if they fit the issue, or whether she was being improperly influenced by Len. Were Len's objectives achieved in the first exchange? Yes, I believe so. Len didn’t change...
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...transportation and wages. Morals this man did not have, making an organization on what seemed like morals promising to manage Indians genuinely and issue stocks to other, neither of which happened. Temperance and achievement have no relationship for Astor's situation. Astor had high achievement however poor or extremely humbler temperance. Indeed, even to the end of his life he contributed little to society. For Astor achievement was a temperance and disappointment was impossible. 2. In 1832, individuals trusted that the exchange of this product was what was bringing about the spread of cholera. This made individuals quit needing to exchange the product. At that point in 1837, the steamboat, conveyed smallpox up the Mississippi, murdering more than 17,000 individuals. Additionally, in the mid 1800s the pattern changed from hide to silk . The authentic strengths that embroiled these progressions were globalization, imbalance, country state and risk. 3. Monetarily, the products were light so it was less demanding for dealers to transport by donkeys, freight ships, and ships to eastern ports and after that to Europe. Benefits were tremendous. Administratively, with Astor, they don't have anything on him since he utilized an item that he knew merchants would acknowledge. That product was liquor....
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...Select one (1) MNC that does not currently do business in China. Next, consider the steps that the company should consider in determining the feasibility of entering the Chinese market and establishing a market for its products or services there. In addition to your own research, use the following links to conduct a country risk assessment (CRA) on China: Bureau of Economic Analysis: www.bea.gov Transparency International Corruptions Perceptions Index:http://www.transparency.org/cpi2013/results Ranking of Economies-World Bank:http://www.doingbusiness.org/rankings IMF Home Page:http://www.imf.org/external/index.htm Country Risk Classification-OECD:http://www.oecd.org/tad/xcred/crc.htm World Trade Organization Home Page:http://www.wto.org/ “Industry Analysis: Recreation” article:http://www.valueline.com/Stocks/Industries/Industry_Analysis__Recreation.aspx Focus on the following areas: corruption, political stability, exchange rate stability, regulatory oversight, freedom of the press, and rule of law. Research other factors that you believe you should evaluate. Additionally, consider the importance of culture in evaluating risk. Then, go to the Hofstede Center’s Country Comparison cultural tool, located at http://geert-hofstede.com/china.html. Compare China to the U.S. on Hofstede’s six (6) key cultural dimensions scale by selecting “United States” from the “Comparison Country” drop-down menu. Write an eight to ten (8-10) page paper in which you: ...
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...High-Risk Investments By: Prisha Marwaha FIN550: Corporate Investment Analysis Dr. Glenn L. Stevens August 29, 2013 Introduction In their research study, Souder & Myles (2010) identify that risk is chiefly fundamental to investing. Böhringer & Löschel (2008) further add that there is no discussion of returns or performance that is deemed meaningful in the absence of at least some mention of the involved risk. However, the trouble for investors, who have just entered into the marketplace, involves the process of figuring where risk really lies, as well as what the difference between the various levels of risks. Relating to the manner, in which risk is fundamental to investments, a significant number of new investors tend to assume that risk is a well-defined and quantifiable idea. However, it is not the case. As such, a universally agreed definition of the term, and how it should be measured, has not been attained. Central to this paper are high-risk investments. It is a form of an investment where there is a larger percentage chance of capital loss or a high likelihood of underperformance. The purpose of this paper is to research high-risk investment brokerage firms that have been indicted or convicted of ethical violations to provide insight and understanding of this market segment. To realize this objective, the Internet will be used as the chief research method. The information sources will be derived from academic databases, such as Wiley Online...
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...Abstract Like any other form of business or enterprise, investing internationally is a risk that can be turned into opportunity once well managed. There is a veritable sea of benefits in international portfolio investment. These include participation in the growth of other countries, hedging against exchange rate exposure to risk, diversification benefits and advantages (abnormal returns) of market segmentation on a global scale. However, we cannot be so overwhelmed by the payoff of international portfolio investment as to overlook the bitter side of it. In an international environment, financial investments are not only subject to currency risk and political risk, but also to many institutional constraints and barriers. What are crucial in international portfolio investment are optimal portfolio allocation and the associated market and currency risks. Diversification into multiple securities can practically eliminate potential severe losses from any individual security. However, domestic diversification cannot remove systematic market risk due to high correlations among most domestic securities. Since market risk differs from country to country, international diversification can reduce substantially the overall risk exposure of investment portfolios. Introduction and Overview Increased global competition and opportunity have attracted many national economies and individual domestic businesses to the international markets. In recent...
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...market - resulting in lower profits - Internet burst in 1999 The Bid - entering the US market If the VSC company would win the bid it could mean an increase in net income, which was important for the VSC company. VSC was awarded the contract and won thereby the bid. Six months to create the hardware and soft for the US company Outstanding reputation in Europe not US. The reputation of the company would rely on the delivery to this US company. Lost money because of changes in exchange rate. Lower risk for further loss of money (see the case) Questions to the case: 1. What type of international business transaction is VSC planning to undertake, and what expected international financial flows are involved in this transaction? 2. What risks are associated with these expected financial flows? 3. How can VSC protect itself against these risks using real or financial hedging? 4. What alternative or method for insuring against risk do you recommend VSC to use? Why? Alternativt resultat givet af Camilla på BB: We had the challenge that there are some competing solutions from a more financebased view floating around on the Internet. Notice that the case was slightly altered and some information was changed in the translation from a finance case to an international business case. The finance case for example assumes based on projections and using PPP/Fisher Effect that there will be a 15% further appreciation of the ...
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...To: | George Saoud | From: | Peter Zarin | CC: | Stephen Heath, George Saoud and Salesh Nischal | Date: | Xxxxx | Re: | Hedge Accounting – Designation and Effective Testing as at 30 June 2015 | Executive Summary In Q4 FY15, FHL Group decided to elect to adopt IFRS 9 Hedge Accounting which will enable the Group to more effectively mitigate the adverse foreign exchange movements involved with importing of raw materials and finished goods for our leading retail business units, c $120M per year. The identification of foreign exchange risk has been formally identified as a key financial risk to the Group and as such compliments this decision to adopt hedge accounting as a method by which to minimise the volatility of the AUD against the USD contracts. The risk likelihood and impact are considered high in both cases. FHL has chosen to hedge with Forwards Exchange Contracts to hedge the foreign exchange risk. A forward contract is a contract to exchange a fixed amount of f financial assets on a fixed future date at a fixed price. The fair value of a forward contract is affected by changes in the spot rate and changes in the forward points. Although the Group has used forward contracts in the past, the adoption of IFRS 9 Hedge Accounting has not been applied because the tenure of the contracts was hedging against AUD/USD FX rates three months out from the accounting period. The Board has decided that the tenure should now look prospectively 6 months out which brings...
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