International Finance

For Non-Financial Managers

Dora Hancock

• Publisher: Kogan Page
• Year: 2018
• ISBN:
  9780749480028
• Edition: 1
• Topic: Business
• Subtopic: Finance
• Index: Business

International Finance offers a clear and accessible introduction to the fundamental principles and practice of international finance in today's world, from the international financial environment and exchange rates, to financing multinational companies and international investment. The theory and techniques are presented with the non-financial manager in mind, and the theoretical material is supplemented by case studies and a discussion of the appropriateness of the various techniques and principles to solve practical problems. This book draws from examples and practice around the world, helping students of international corporate finance, particularly non-specialist finance students, understand the complexities of modern Europe and comparative systems of finance globally. International Finance is essential reading for anyone studying international finance or needing an up-to-date, engaging resource to help them navigate the complicated and ever-changing global financial world. Key theories and terms are explained and defined, avoiding unnecessary jargon and acknowledging that many readers are coming to the subject with little or no prior knowledge of corporate finance at all. Online supporting resources include PowerPoint lecture slides.

08

Determining and managing exchange risk

At the end of this chapter you will be able to:

• identify and discuss the different types of exchange risk;
• identify strategies for reducing transaction exposure;
• construct a money market hedge to hedge a transaction risk and compare to the equivalent forward rate hedge to select the optimum hedge;
• discuss hedging and economic exposure.

Introduction

In previous chapters we discussed the determinants of exchange risks and suggested that companies may suffer losses due to changes in exchange rates. In this chapter we are going to look in detail at the risks faced by companies trading internationally and the strategies they can take to reduce or eliminate those risks. Finally we will consider the benefits, as well as the costs, of hedging risks.

Risks

Companies face three different kinds of exchange risk:

• translation risk;
• transaction risk;
• economic or operating risk.

We will discuss each of these in turn and then consider how a company can manage these risks.

Translation risk

Translation risk is the risk that exchange rate movements will have an impact on the published financial statements, the income statement and the statement of financial position of companies.

We can see how this works with a simple example.

Example

Suppose an MNC determines that the following amounts are owed between subsidiaries in the group.

Table 8.1 Proportion of GDP spent by governments 2014

Debt (in £’000) due from company based in	Payment (in £’000) due to company based in
	Canada	US	Germany	Turkey	Japan
Canada	–	50	100	30	50
US	70	–	40	70	60
Germany	110	40	–	30	40
Turkey	20	60	20	–	60
Japan	20	70	30	30	–

We can see that the Canada subsidiary owes the equivalent of £50,000 to the US subsidiary, which itself owes £70,000 to the Canadian subsi...