Sunday, 16 August 2020

Management of Transaction Exposure

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Management of Transaction Exposure

 

 

The unit focuses on the measurement and management of transaction exposure.

Transaction exposure measures gains or losses that arise from the settlement of existing

financial obligations whose terms are stated in a foreign currency.

Transaction exposure can be hedged by financial contracts like forward, money market

and option contracts as well as by other operational techniques like lead/lag strategy and

exposure netting.

Transaction exposure measures the effect of an exchange rate change on outstanding

obligations which existed before exchange rates changed but were settled after the exchange

rate changes.

Transaction exposure thus deals with changes in cash flows that result from existing

contractual obligations.

This unit analyses how transaction exposure is measured and managed.

A primary objective of this unit is to provide an overview of hedging techniques.

Yet, transaction exposure cannot always be hedged in all cases. Even when it can be

hedged, the firm must decide whether a hedge is feasible or not; generally firm comes to

know whether hedging is worthwhile or not after a certain period of time.

 

 

Call Option: Call option is the right, but not the obligation, to buy a foreign currency at a

specified price, upto the expiration date.

Currency Correlations: The degree of simultaneous movements of two or more currencies with

respect to some base currency.

Currency Volatility: The volatility of a currency is a measure of the change in price over a given

time period.

Exposure Netting: Exposure netting involves offsetting exposures in one currency with exposures

in the same or another currency, where exchange rates are expected to move in such a way that

losses (gains) on the first exposed position should be offset by gains (losses) on the second

currency exposure.

Money Market Hedge: A Money Market Hedge involves simultaneous borrowing and lending

activities in two different currencies.

Put Option: Put option gives the buyer the right, but not the obligation, to sell a specified

number of foreign currency units to the option seller at a fixed price up to the option’s expiration

date.

Notes Transaction Exposure: Transaction exposure measures gains or losses that arise from the

settlement of existing financial obligation whose terms are stated in a foreign currency.

 

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