International Corporate Finance: Value Creation with Currency Derivatives in Global Capital Markets, + Website

PART Four

Managing Foreign Exchange Risk

The exchange rate variable permeates all key financial management decisions and injects a considerable degree of variability into a firm's overall risk profile. Part Four starts by asking whether hedging a part or the totality of a firm's exposure to currency risk is indeed value-creating for the firm's owners and therefore warranted (Chapter 14). To the extent that exchange rate forecasting (Chapter 15) is indeed a treacherous activity in the context of clean floating exchange rates, we take a “total risk” view of risk management. Exporters/importers as well as multinational corporations and globally reaching financial institutions generally hedge their exposures to both transaction and translation exposure by using forwards, futures, options, or swaps. Measuring and managing transaction, translation, and economic/operating exposures are discussed in Chapters 16, 17, and 18, respectively.