1 INTERNATIONAL FINANCE Multiple Currency Transaction Exposure 2

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1 INTERNATIONAL FINANCE Multiple Currency Transaction Exposure

1 INTERNATIONAL FINANCE Multiple Currency Transaction Exposure

2 Estimate Net CFs in Each Currency • Example: This American company has exposure

2 Estimate Net CFs in Each Currency • Example: This American company has exposure in four foreign currencies over the next quarter.

3 Weight the Dollar Cash Flows Pound 15 15/16 =. 9375 Can. $ 8

3 Weight the Dollar Cash Flows Pound 15 15/16 =. 9375 Can. $ 8 8/16 =. 5 S. Krona -15/16 = -. 9375 Peso 8 8/16 =. 5. 16 1. 0 Note that there is an expected net cash inflow of $16 million. But what is its standard deviation?

4 Estimate Volatility (standard deviation) of XR Movements over the Quarter British Pound –

4 Estimate Volatility (standard deviation) of XR Movements over the Quarter British Pound – 2. 8% Canadian Dollar – 2. 7% Swedish Krona – 3. 2% Mexican Peso – 3. 5%

5 Estimate the Correlations Between these Currencies over the Next Quarter Pound Canadian $

5 Estimate the Correlations Between these Currencies over the Next Quarter Pound Canadian $ S. Krona M. Peso Pound 1. 0 . 35 . 83 . 25 Canadian $ . 35 1. 0 . 57 . 40 S. Krona . 83 . 57 1. 0 . 20 M. Peso . 25 . 40 . 20 1. 0

6 Build a Variance/Covariance Matrix Pound Canadian $ S. Krona M. Peso Pound 0.

6 Build a Variance/Covariance Matrix Pound Canadian $ S. Krona M. Peso Pound 0. 000784 0. 0002646 0. 00074368 0. 000245 Canadian $ 0. 0002646 0. 000729 0. 00049248 0. 000378 S. Krona 0. 00074368 0. 00049248 0. 001024 0. 000224 M. Peso 0. 000245 0. 000378 0. 000224 0. 001225

7 Build a Wtd. Var/Cov Matrix Pound Canadian $ S. Krona M. Peso Pound

7 Build a Wtd. Var/Cov Matrix Pound Canadian $ S. Krona M. Peso Pound 0. 000689063 0. 000124031 -0. 000653625 0. 000114844 Canadian $ 0. 000124031 0. 00018225 -0. 00023085 0. 0000945 S. Krona -0. 000653625 -0. 00023085 0. 0009 -0. 000105 M. Peso 0. 000114844 0. 0000945 -0. 000105 0. 00030625

8 Determine the Portfolio Standard Deviation Variance = sum of cells in wtd. var/cov

8 Determine the Portfolio Standard Deviation Variance = sum of cells in wtd. var/cov matrix =. 00076536 Standard Deviation = Square Root of Variance = 2. 7665%

9 Determine Possible Cash Flow • Expected Value = $16 million • Minus One

9 Determine Possible Cash Flow • Expected Value = $16 million • Minus One S. D. = $15. 557 million • Minus Two S. D. = $15. 115 million • Plus One S. D. = $16. 443 million • Plus Two S. D. = $16. 885 million • Now decide if you want to hedge this risk

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Chapter 08 Transaction Exposure 1 Transaction Exposure TheChapter 08 Transaction Exposure 1 Transaction Exposure The
Hedging Economic Exposure Transaction Exposure vs Economic ExposureHedging Economic Exposure Transaction Exposure vs Economic Exposure
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Chapter 14 Transaction Exposure to Currency Risk 14Chapter 14 Transaction Exposure to Currency Risk 14
Transaction Processing Transaction Concept A transaction is aTransaction Processing Transaction Concept A transaction is a
Transaction Management Transactions Transaction Concept Transaction State ConcurrentTransaction Management Transactions Transaction Concept Transaction State Concurrent