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International Finance - Assignment Example

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There are mainly three types of foreign exchange risks or exposures.This is also known as accounting risk,which a firm faces when it has subsidiary operations in other countries. This risk can be hedged by using currency futures, currency swaps etc…
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International Finance
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International Finance

For cash payments, it can sell the 90-days forward contract to buy US$ at 1.6930. At the expiry, the company will have to sell C$6,237,448 to buy the US$10,560,000. Furthermore, for the receipts the company will have to buy C$ at 1.6960 where it will be selling US$1,560,000 to buy C$919,811. Keeping in view the costs of transactions, the company can sell the 90-days forward contract to hedge the net cash flows of US$9,000,000 at bid rate of C$/US$ 1.6930. The amount payable will be C$5,316,007. ii. Money market hedge on payables will involve taking money market position to cover the future payment. Kennedy Plc can either use its own funds for the hedge or it can borrow the funds in home currency (C$) and make a short-term investment for 90 days in foreign currency. C$ borrowing rate = 3.5625% US$ deposit rate = 2.25% It needs US$10,560,000 in 90 days, therefore, the amount needed to be deposited in US$ is US$10,560,000 / (1 + (0.0225 * (90/360))) = US$10,500,932 Deposit amount in C$ = US$10,500,932/ 1.6875 = C$6,222,774 This amount can be borrowed at an annual interest rate of 3.5625%. C$ amount of loan repayment after 3 months = C$6,222,774* (1+ (0.035625 *(90/360))) = C$6,278,196 Therefore, the company would borrow C$6,222,774 at 3.5625% p.a. for 90 days. Convert the amount into US$ at spot rate of 1.6875, which will amount to US$10,500,932. Deposit this amount at US$ money market deposit rate 2.25% p.a. for 90 days. This will give the amount to be paid i.e. US$10,560,000. At the end of 90 days, Kennedy will make the loan repayment of C$6,278,196. This hedge will allow the company to fix the amount to be paid after three months. To hedge the receivables: Amount expected to be received = US$1,560,000...
There are mainly three types of foreign exchange risks or exposures.This is also known as accounting risk, which a firm faces when it has subsidiary operations in other countries. When the foreign exchange movements adversely affect the translated values of assets and liabilities of the subsidiaries, it becomes an unwanted exposure for the parent company’s consolidated financial statements. This risk can be hedged by using currency futures, currency swaps etc.Transaction Exposure: This exposure is related to the future payments and receipts in foreign currency. Companies many a times limit this type of exposure by requiring the cash flows to be received and made in the home currency rather than foreign currency. Another way to minimize this risk is netting out the exposure by a lot of different currencies or only in one currency (Jacque, 1997, p.177). This is done by large corporations with significant amounts of international operations. Other techniques for alleviating short-term currency risks are currency forwards, currency futures, money market hedge, option hedge and cross hedge (Kelley, 2001, pp.32-34).Economic Exposure: This exposure is faced by corporations with large international presence and relates more with the net present value of future cash flows of a firm. The management of economic exposure involves the use of complex instruments and strategies besides the foreign exchange management (Ajami and Goddard, 2006, pp.110-111) ... Read More
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