CHAPTER 8 MANAGEMENT OF TRANSACTION EXPOSURESUGGESTED ANSWERS AND SOLUTIONS TO END—OF -CHAPTER QUESTIONS ANDPROBLEMSQUESTIONS1. How would you define transaction eXpoHoweis it different from economic exposureAnswer: Transactionexposureis the sensitiviof realizedomestic currencyvaluesof the firm’scontractuadash flows denominated in foreigncurrencieto unexpectedchanges in exchange ratesUnlike economic exposure transaction exposure is well-defined and °short-term2. Discussand compare hedging transactioaaxposureusing the forward contracVs。 money marketinstruments When do the alternative hedging approaches produce the?same resultAnswer:Hedging transaction exposure by a f orward contract is achieved by selling or buying f ocurrencyreceivablesr payablesforward On theotherhand, money market hedge isachievedbyborrowingor lendingthepresentvalueof foreigncurrencyreceivablesr payable, therebycreatingoff setting f oreign currency positions. If the interest rate parity is holding, the two hedging requivalent3。Discuss and compare the costs of hedging via the forward contract and the options contractAnswer:There is no up-front cost of hedging by forward cnntheccase of options hedginghowever ,hedgers should pay the premiums for the contractup—front The cost of forwardhedging however, may be realized ex post when the hedger regrets his/her hedging decision.4. What are the advantages of a currency options contract as a hedging tool compared wi th the focontrac?tAnswer : The main advantageof using optionscontractfor hedging is thatthe hedger can decidewhether to exercise)ptionsupon observingthe realizefuturesxchange rate.Options thus provideaIM-1hedge against ejxost regret that f orward hedger might) huffer. Hedgers can only elitiisiatedownside risk while retaining the...
