79. Transaction Exposure. Транзакционная экспозиция.

Transaction Exposure – measures changes in the value of outstanding financial obligations incurred prior to a change in exchange rates. Transaction exposure is the risk, faced by companies involved in international trade, that currency exchange rates will change after the companies have already entered into financial obligations. Such exposure to fluctuating exchange rates can lead to major losses for firms

A firm has transaction exposure whenever it has contractual cash flows (receivables and payables) whose values are subject to unanticipated changes in exchange rates due to a contract being denominated in a foreign currency. To realize the domestic value of its foreign-denominated cash flows, the firm must exchange foreign currency for domestic currency. As firms negotiate contracts with set prices and delivery dates in the face of a volatile foreign exchange market with exchange rates constantly fluctuating, the firms face a risk of changes in the exchange rate between the foreign and domestic currency. Firms generally become exposed as a direct result of activities such as importing and exporting or borrowing and investing. Exchange rates may move by up to 10% within any single year, which can significantly affect a firm's cash flows, meaning a 10% decline in the value of a receivable or a 10% rise in the value of a payable. Such outcomes could be troublesome as export profits could be negated entirely or import costs could rise substantially.

Often, when a company identifies such exposure to changing exchange rates, it will choose to implement a hedging strategy, using forward rates to lock in an exchange rate and thus eliminate the exposure to the risk.

Managing Transaction Exposure:

General Hedging Rule: 1) Future foreign currency cash outflow: Certain => Go long futures or forwards; Uncertain => Buy a call option. 2) Future foreign currency cash inflow: Certain => Go short futures or forwards; Uncertain => Buy a put option.

Contractual Hedges:

Forward Market Hedge: Involves a forward contract and a source of funds to fulfill that contract. The forward contract is entered at the time the transaction exposure is created. Offsetting receivables/payables denominated in a foreign currency with a forward contract to sell/buy that currency.

Money Market Hedge: Involves a contract and a source of funds to fulfill that contract. In this case, the contract is a loan agreement. Reversing foreign currency receivables/payables by creating matching payables/receivables through borrowing in the money markets.

Options Market Hedge: Offsetting a foreign currency denominated receivable/payable with a put option or a call option in that currency.

Futures Market Hedge: Similar to hedging with forwards.

Financial Hedges:

Swaps

Operating Strategies:

Risk Shifting: Strategy for risk shifting: Denominating exports in a strong currency and Denominating imports in a weak currency.

Exposure Netting: Offsetting exposures in one currency with exposures in the same or another currency. A firm’s currency exposures can be viewed as a portfolio. Exposure netting depends on the correlation between currencies

Risk Sharing: Agreement to share currency risk. Risk sharing arrangements: a) Price adjustment clause; b) Neutral zone; c) Outside neutral zone.