国际金融英文版(托马斯.A.普格尔 著)--- Chapter Four

Covered international investment and uncovered international investment
EXCHANGE RATE RISK

Some important facts:

Spot exchange rates change from minute to minute in a
cannot be wholly or precisely predicted regardless of the exchange rate system.
EXCHANGE RATE RISK

What is exchange risk?

Currency risk is a form of risk that arises from the change in price
Chapter Four Forward Exchange and International Financial Investment
Forward Exchange and International Financial Investment

Exchange rate risk, hedging and speculating The market basics of forward foreign exchange

A forward exchange contract is an agreement to buy or sell a foreign currency for future delivery at a price set now.

Banks acting as foreign exchange dealers generally are willing to meet the needs of their customers for the
transaction, future transaction and option
transaction to hedge or to speculate.
The market basics of forward foreign exchange

What is a forward exchange contract?
EXCHANGE RATE RISK

Two types of response to exchange rate risk

Hedging is the act of balancing your assets and liabilities in a foreign currency to become immune to exchange rate risk. (hedgers)
specific size of the forward exchange contract and the
specific date in the future for the exchange.

The price set now is called the forward exchange rate.
floating-rate system. (appreciation or depreciation)

In a fixed-rate system, spot exchange rate also change from minute to minute, but the range of the rate is limited to a small band around the par value as long as the fixed rate is defended successfully by the government authorities. When

Speculating means taking a long or a short position in a foreign currency, thereby gambling on its future exchange value. (speculators)
The market basics of forward foreign exchange
EXCHANGE RATE RISK


Economic exposure: the risk that a company’s profits will be eroded by exchange rate changes because of rising operating costs. Companies are very limited in the actions they can take to protect themselves in this situation. Translation exposure: the risk that exchange rate changes will diminish a company’s income, assets, equity or liabilities. Their denomination is therefore significant—although some analysts believe that real assets (those that are physical and identifiable rather than financial) are hardly affected by currency movements at all. To insulate against this risk, fund managers undertake “currency hedging.” This is a sophisticated technique involving keeping a close watch on exchange rate changes, and diversification of a company’s holdings in different currencies.
EXCHANGE RATE RISK


Transaction exposure. the risk that exchange rates will change after a contract is agreed, but before it is completed (or after borrowing/lending agreements are established but before repayments have been made), and that major losses will occur as a result. This is a problem frequently faced by companies working in international markets. It’s not usually practical to demand advance payment from customers (and impossible to apply this in a borrowing/lending situation), so a technique called “factoring” is used to reduce the risk. This involves selling off a company’s foreign accounts receivable to a “factoring house,” which then takes on the responsibility for credit and collections. Factoring houses typically buy the accounts receivable at 90—95 % of their value, although the discount may be greater. Companies often recoup their losses through product price adjustment.
of one currency against another. Whenever investors or companies have assets or business operations across national borders, they
face currency risk if their positions are not hedged.

How can we hedge or speculate?

We can hedge or speculate by conducting
some foreign exchange transactions. In fact,
we can use spot transaction, forward

A person (or an organization) holding a net asset position (a long position) or a net liability position (a short position) in a foreign
currency is exposed to exchange rate risk. The value of the person’s
have lost money. Any and all stock market investments
are subject to currency risk, regardless of the nationality of the investor or the investment, and whether they are the same or different. The only way to avoid currency risk is to invest in commodities, which hold value independent of any monetary system.
the fixed-rate system collapses, large changes of exchange
rate will occur. (devaluation or revaluation)
EXCHANGE RATE RISK

The change of the exchange rate can be partly but
The market basics of forward foreign exchange

Do not confuse the forward rate with the
future spot rate, the future spot rate
could be above, below or equal to the forward rate.

Currency risk exists regardless of whether you are investing domestically or abroad. If you invest in your home country, and your home currency devalues, you
(or the organization’s) income or net worth will change if the exchange rate changes in a way that the person does not expect.
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For example (p46)
EXCHANGE RATE RISK