Chapter 8

Refers to a situation in which the firm may or may not be subject to exchange exposure.

Involves hedging a position in one asset by taking a position in another asset.

The extent to which the value of the firm would be affected by unanticipated changes in exchange rates.

Helps to centralize the firm's exchange exposure management function in one location.

A method of hedging exchange risk exposure in which a foreign currency contract is sold or bought forward.

A method of hedging exchange risk exposure by invoicing in terms of the home currency of the firm.

Reducing transaction exposure by paying or collecting foreign financial obligations early (lead) or late (lag) depending on whether the currency is hard or soft.

A method of hedging transaction exposure by borrowing and lending in the domestic and foreign money markets.

Use of put and call options to limit the downside risk of transaction exposure while preserving the upside potential. The price of such flexibility is the option premium.

A financial subsidiary used as a mechanism for centralizing exposure management functions. All the invoices arising from intrafirm transaction are sent here, where exposure is netted. Once the residual exposure is determined, then foreign exchange experts at the center determine optimal hedging methods and implement them.

The sensitivity of "realized" domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes. Hence, it is about how the amount of money the firm owes in foreign currency or expects to receive in foreign currency in the future changes due to exchange rate movements.

Arises from fixed-price contracting in a world where exchange rates are changing randomly.

The potential that the firm's consolidated financial statements can be affected by changes in exchange rates.