...J. of Multi. Fin. Manag. 13 (2003) 123 Á/139 www.elsevier.com/locate/econbase Foreign-denominated debt and foreign currency derivatives: complements or substitutes in hedging foreign currency risk? William B. Elliott a,*, Stephen P. Huffman b, Stephen D. Makar b a Department of Finance, Oklahoma State University, 224 Business, Stillwater, OK 74078, USA b University of Wisconsin Oshkosh, Oshkosh, WI, USA Received 30 June 2001; accepted 20 April 2002 Abstract Using a unique dataset, this study examines the relationship between foreign-denominated debt (FDD), foreign currency exposure and foreign currency derivative (FCD) use, for a sample of US multinational corporations. We find a positive relationship between the exposure to foreign currency risk and the level of FDD, indicating that this debt may be used as a hedge. Moreover, FDD is negatively related to the use of FCD. We interpret this as further evidence that FDD is used as a hedge, and substitutes for the use of FCD in reducing currency risk. # 2002 Elsevier Science B.V. All rights reserved. Keywords: F23 Keywords: Hedging; Foreign debt; Currency derivatives 1. Introduction US multinational corporations (MNCs) employ a variety of financial and nonfinancial techniques to reduce or hedge their exposure to changing exchange rates (e.g. Bodnar et al., 1998; Marshall, 2000). Financial techniques include foreign- * Corresponding author. Tel.: '/1-405-744-8639; fax: '/1-405-744-5180 E-mail address: elliowb@okstate...
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...FIN 403 Week 3 Learning Team Assignment Foreign Exchange and Derivatives Market Paper To Buy This material Click below link http://www.uoptutors.com/FIN-403/FIN-403-Week-3-Learning-Team-Assignment-Foreign-Exchange-and-Derivatives-Market-Paper FIN 403 Week 3 Learning Team Assignment Foreign Exchange and Derivatives Market Paper Resource: Investment Decision Selection Paper Prepare a 1,750-2,450-word paper. Analyze the impact of the foreign exchange and derivatives markets on your organization and countries in which the organization is considering expansion. Describe the impact of exchange rate convertibility, bid-ask spreads, real exchange rates, and the interest rate parity on the relative investment attractiveness of the countries in your scenario. Answer the following questions in your paper: Does purchasing power parity hold? What is its significance? What happened to the value of the real exchange rate over time? What is the significance of this change in value? What are bid-ask spreads for each currency? Include your calculations. What are implications of the absence or presence of a forward exchange market? Does interest rate parity hold? What is its significance? What international arbitrage opportunities exist in your organization? How may the organization take advantage of these for profit? Cite data sources you used for calculations. If you used an electronic source, include the URL. If you used a print source, attach a copy to your paper. Format your...
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...BRAC University Journal, vol. V, no. 2, 2008, pp. 81-91 FOREIGN EXCHANGE RISK MANAGEMENT PRACTICES - A STUDY IN INDIAN SCENARIO Sathya Swaroop Debasish Department of Business Management Fakir Mohan University Vyasa Vihar, Balasore - 756019 Orissa, INDIA ABSTRACT Indian economy in the post-liberalisation era has witnessed increasing awareness of the need for introduction of various risk management products to enable hedging against market risk in a cost effective way. This industry-wide, cross-sectional study concentrates on recent foreign exchange risk management practices and derivatives product usage by large non-banking Indian-based firms. The study is exploratory in nature and aims at an understanding the risk appetite and FERM (Foreign Exchange Risk Management) practices of Indian corporate enterprises. This study focusses on the activity of end-users of financial derivatives and is confined to 501 non-banking corporate enterprises. A combination of simple random and judgement sampling was used for selecting the corporate enterprises and the major statistical tools used were Correlation and Factor analysis. The study finds wide usage of derivative products for risk management and the prime reason of hedging is reduction in volatility of cash flows. VAR (Value-at-Risk) technique was found to be the preferred method of risk evaluation by maximum number of Indian corporate. Further, in terms of the external techniques for risk hedging, the preference...
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...Economics 2 (2006) 129-146 EXCHANGE RATE RISK MEASUREMENT AND MANAGEMENT: ISSUES AND APPROACHES FOR FIRMS MICHAEL G. PAPAIOANNOU, Ph.D. International Monetary Fund Abstract Measuring and managing exchange rate risk exposure is important for reducing a firm’s vulnerabilities from major exchange rate movements, which could adversely affect profit margins and the value of assets. This paper reviews the traditional types of exchange rate risk faced by firms, namely transaction, translation and economic risks, presents the VaR approach as the currently predominant method of measuring a firm’s exchange rate risk exposure, and examines the main advantages and disadvantages of various exchange rate risk management strategies, including tactical vs. strategical and passive vs. active hedging. In addition, it outlines a set of widely-accepted best practices in managing currency risk and presents some of the main hedging instruments in the OTC and exchange-traded markets. The paper also provides some data on the use of financial derivatives instruments, and hedging practices by US firms. JEL Classification: F31, G13, G15, G32, M21 Keywords: Financial Risk, Financial Management, Foreign Exchange Hedging, Corporate Hedging Practices Corresponding address: 700 19th Street, N.W. Washington, DC 20431 e-mail: mpapaioannou@imf.org This paper draws heavily on various presentations on risk management while the author was the Director of Foreign Exchange Service of the WEFA Group...
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...[pic] CHAPTER – I GRAND PROJECT ON CURRENCY DERIVATIVES NANCY SHAH – PROJECT TRAINEE CHAPTER 2 INTRODUCTION TO CURRENCY MARKETS 2.1 BASIC FOREIGN EXCHANGE DEFINITIONS Spot: Foreign exchange spot trading is buying one currency with a different currency for immediate delivery. The standard settlement convention for Foreign Exchange Spot trades is T+2 days, i.e., two business days from the date of trade. Forward Outright: A foreign exchange forward is a contract between two counterparties to exchange one currency for another on any day after spot. In this transaction, money does not actually change hands until some agreed upon future date. The duration of the trade can be a few days, months or years. For most major currencies, three business days or more after deal date would constitute a forward transaction Base Currency / Terms Currency: In foreign exchange markets, the base currency is the first currency in a currency pair. The second currency is called as the terms currency. Exchange rates are quoted in per unit of the base currency. E.g. The expression US Dollar–Rupee, tells you that the US Dollar is being quoted in terms of the Rupee. The US Dollar is the base currency and the Rupee is the terms currency. Exchange rates are constantly changing, which means that the value of one currency in terms of the other is constantly in flux. Changes in rates are expressed as strengthening or weakening of one currency vis-à-vis the other currency...
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...refereed. Information on South African Reserve Bank Working Papers can be found at http://www.resbank.co.za/Research/ResearchPapers/WorkingPapers/Pages/WorkingPapers-Home.aspx Enquiries Head: Research Department South African Reserve Bank P O Box 427 Pretoria 0001 Tel. no.: +27 12 313-3911 0861 12 SARB (0861 12 7272) © South African Reserve Bank All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means without fully acknowledging the author(s) and this Working Paper as the source. Contents 1. 2. 3. 3.1 3.2 4. 5. Figures 1. 2. Tables 1. 2. 3. 4. 5. Stock Markets in Selected Advanced and Emerging Economies ...................................... 5 Foreign Exchange Turnover, 2013 .................................................................................... 9 Currency Speculation (Forward Carry) Returns...
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...Globalization When undertaking to implement major financial decisions like investing in foreign stock exchange markets. It is important for organizations to conduct due diligence of this decision. This decision might mean the generation of substantial profits, especially where a corporation gets enlisted in a stock exchange market of a foreign country. Huge profits are realized when the company invites the members of the public to subscribe its stake through (IPO) initial public offer. On the other hand, a company might accrue massive losses perhaps due to shares volatility (Maskell & Baggaley, 2003). It is of the essence that a Company evaluates the proposed investment decision of getting enlisted in foreign countries stock exchange market they choose to invest. Due diligence will enable the Company access all information relating to the movement of stock and share prices. This information will allow a company to avoid investing in equity markets that are highly volatile (Maskell & Baggaley, 2003. (Maskell & Baggaley, 2003), defines foreign-exchange risk fluctuations in the prices or value of an investment due to changes in foreign exchange rates or exchange rates. This risk is also known as exchange rate risk or merely currency risk; it is simply the loss an investor accrues during a long or a short position due to unfavourable movements in the exchange rates. Currency risk mostly affects international businesses that are more into imports and exports...
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...TABLE OF CONTENTS DECLARATION ii LIST OF ABBREVIATIONS iii CHAPTER ONE: INTRODUCTION 1 1.1 Background 1 1.1.1 Derivatives 2 1.1.2 Foreign Currency Exposure of a Commercial Bank 3 1.1.3 Effect of derivatives on foreign exchange exposure 5 1.1.4 Commercial Banks in Kenya 6 1.2 Research Problem 7 1.3 Objectives of the Study 8 1.4 Value of the Study 9 CHAPTER TWO: LITERATURE REVIEW 10 2.1 Introduction 10 2.2 Theoretical review 10 2.3 Foreign Exchange Risk Management 13 2.6 Empirical Review 18 2.6 Summary of Literature review 19 CHAPTER THREE: RESEARCH METHODOLOGY 20 3.1 Introduction 20 3.2 Research Design 20 3.3 Study Population 20 3.4 Data Collection Procedures 20 3.5 Data Analysis and Presentation 20 REFERENCES 22 APPENDICES 26 LIST OF ABBREVIATIONS CBK – Central Bank of Kenya ERV - Exchange rate volatility FOREX – Foreign Exchange FX – Foreign Exchange IFE – International Fisher Effect IFX - Income from foreign currencies as a percentage of total income IRP – Interest Rate Parity MST – Market Segmentation Theory NA - Net Assets NFXNA - Net Foreign Currency Exposure Relative to Net Assets NFX - Net Foreign Currency Exposure NSE – Nairobi Securities Exchange OS - Ownership Status or Nature of Ownership PPP – Purchasing Power Parity CHAPTER ONE: INTRODUCTION 1.1 Background The traditional role for commercial banks has been perceived...
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...in 2008, currency derivative trade in India had experienced explosive growth, both in volumes and value over the years across all the four currencies contracts that were in operation in INRUSD, INRGBP, INREUR and INRJPY. However in terms of the open interest currency derivatives trade in MCX is more as compared to the NSE. By consider both stock and commodity exchanges for launching currency futures contracts government of India has done a commendable job which is expected to increase the number of quality players, introduce healthy competition and boost trading volumes of Indian currency futures. The global markets (mainly USA) become active only after Indian markets close at 5.00 pm and as a result there is an evident fear about the risks associated with overnight fluctuations in the currency pair. Therefore the functioning as well as the profitability in Indian currency futures is effected by the current performance of the international currency futures market. It is imperative that any evaluation, projection on Indian currency futures market should be undertaken keeping the international market in perspective. KEYWORDS: Currency Futures, Open Interest, Contract Traded, Turnover ___________________________________________________________________________ INTRODUCTION Currency Futures is an agreement or contract, which involves buying or selling one currency for another (foreign exchange), on a specified future date, at an indicated price. Although foreign...
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...International Financial Management Assignment: Exchange Rate Risk Management As the world of business becomes increasingly global, multinational corporations (MNCs) are establishing the production and marketing operations in foreign countries. These MNCs face a variety of challenges. One of challenge faced by MNCs in foreign markets is fluctuations in currency exchange rates. Movements in exchange rates can cause instability in profit margins and significant losses to an MNC’s bottom line. Thus, exchange rate risk management is an integral part in MNC’s decisions about foreign currency exposure. Measuring and managing exchange rate risk exposure are important functions in reducing a MNC’s vulnerabilities from major exchange rate movements. In order to manage currency exchange rate risks, MNC often use financial instruments or currency derivatives. Required: 1. What are the types of exchange rate risks faced by the MNCs? 2. Understand the attempt for the use of foreign exchange derivatives (exchange rate risk management approaches) that can benefits the MNCs. Assignment required student to demonstrate professional skills in research, presentation and communication with full references and an appropriate bibliography. * Assignment should be completed using a word processor and should be no more than 10 pages, using Arial 12, single spaced. * Submission should be a single word document. * This is an independent assessment, and it is unlikely that students...
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...Assignment Derivatives Market in Asian Countries 2 An Overview The purpose of this report is to examine the following; to discuss the derivatives markets in Asian economies whilst simultaneously discussing the benefits and risks posed by these markets to their financial systems. In conclusion, I will propose a set of specific policy actions/recommendations aimed at reducing these risks. Growth in emerging markets has been due to several factors including privatizations, participation of foreign institutional investors, increase in the domestic investor base, and increased IPOs. In a nutshell, economies are taking steps to lowers the cost of capital to spur economic activities by fast-tracking financial market development. If those points stated were considered the first generation, emerging markets now find that they need to focus on the second-generation capital market development issues. These can be stated as: developing financial intermediaries that have professionals with financial sector skills; enhancing domestic institutional investor base with financial sector skills, enhancing domestic institutional investor base in addition to foreign investors, providing self-regulatory organization and developing mechanisms for investor protection (Fratzscher 2006). Derivative Products in Asia There are five main derivatives products that are traded in Asian markets; foreign exchange products, interest rate derivatives, equity derivatives, commodity derivatives, credit derivatives...
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...any need for foreign exchange market, foreign exchange rates or foreign exchange. But in a world of many national currencies, the foreign exchange market plays the crucial role of providing the requisite machinery for making payments across borders, transferring funds and purchasing power from one currency to another, and determining the exchange rate. The fundamental changes in foreign exchange, or FX, market began to take form in 1970′s along with the increasing internationalization of financial transactions and the change of many economies into floating exchange rate system from fixed rate system. Over years, these changes have transformed the foreign exchange market into the world’s biggest and most dynamic market today. The daily turnover of global FX market currently amounts to many trillions of dollars. The objective behind this entire project is to get the basic understanding about an Indian foreign exchange market, Forex Instruments available in India, its functioning, Forexregulators& players. Project has emphasis more on numerical data gathered through different reliable sources to comparing and analysis the performance so far by Indian foreign market with other countries and their currencies which holds a dominant position in the global foreign exchange market. As in the rest of the world, in India too, foreign exchange market is the largest financial market in existence. The phenomenon that has dramatically changed India’s foreign exchange market was liberalization...
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...sovereign debt crisis on the foreign exchange market 1. Introduction In 2010, the debt crisis caused the euro to go down 10% in a three-month period. Some largest hedge funds in America discovered this opportunity and short euro in groups to an enormous scale. Later on, the British pound is being infected. It continuously dropped for six days, which wrote the longest dropping period record. In this paper, the objective is to critically analyse how the European sovereign debt crisis affects foreign exchange markets. The theme focuses on the contagion on the markets. The contagion phenomenon exists between foreign exchange spot and derivative markets. One of the channels is the investor sentiment, which makes large scale of influences on both markets and volatility dynamics (Corredor, P., Ferrer, E., Santamaria, R., 2015). It makes sense on aspects like trading volume, effective transaction costs and so on. This paper has two main parts. The first part is to evaluate impacts on foreign exchange spot market through analysing the political channel, bank channel and financial markert channel. The second part is to investigate impacts on foreign exchange derivatives, especially on the foreign exchange swap. 2. Contagious impact on the foreign exchange market 2-1 Impacts on foreign exchange spot (impacts on euro) In this part, we explain how the debt crisis makes impacts on the foreign exchange spot market, especially, we focus on the exchange rate of euro against dollar...
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...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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...to give a strategic advice to 3M’s current CFO D.W. Meline how to manage 3M’s future exposure of the foreign exchange rate risk. In doing so, the overall profile of the company is discussed; the current foreign exchange risk management instruments are described; and conclusions are drawn, followed by recommendations. ABSTRACT This paper is written with a purpose to give a strategic advice to 3M’s current CFO D.W. Meline how to manage 3M’s future exposure of the foreign exchange rate risk. In doing so, the overall profile of the company is discussed; the current foreign exchange risk management instruments are described; and conclusions are drawn, followed by recommendations. International Risk Management: An Analysis of 3M’s Foreign Risk Management International Risk Management: An Analysis of 3M’s Foreign Risk Management Contents Executive Summary 3 Introduction 4 1. Description Historical Exchange Rates 6 2. Foreign Currency Exchange Rate Risk 10 2.1. Current Strategy to Manage Exchange Rate Risk 10 2.1.1. Cash Flow Hedging 10 2.1.2. Net investment hedging 13 2.2. Currency Translation Effects on Business Segments 14 3. Appreciating and Depreciation of Domestic Currency and Foreign Exchange Rate Risk Management 15 3.1. 3M’s Domestic and International Transactions 15 3.2. Appreciation...
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