FINA 470 Lecture Notes - Lecture 11: Spot Contract, Forward Rate, Cash Flow
5 Mar 2016
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Document Summary
Exchange risk: uncertainty about the future spot rate, includes standard deviation of future spot rate. Exposure: if financial position is affected by unexpected exchange rate changes. It is numerical measure of how sensitive the financial position is to changes. Exposure then is the multiple that hc of an asset or cash flow changes when rate moves by s. Want the variance-minimizing hedge instead of exact perfect hedge. Multiple: bt,t = (change in vt) / (change in st) Contractual exposure: hc value at maturity of a net contractual cash flow denominated in fc. Exposure b is fc value assumed to be risk free as fixed amount. Operating exposure: not fc cash flow in future, but set of activities that require constant decisions by management, customers, and competitors. Depends on exchange risk in foreign and domestic currency. What does contractual exposure achieve? future cash flows, which value depends on exchange. Translation exposure: accounting exposure, when multinational has to consolidate its financial statements.
