Explore BrainMass
Share

International Finance and Transactional Exposure

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

Can someone help me out with two questions that I am struggling with comprehending. Can you provide in layman's term:

1) How does hedging help in limiting a company's transactional exposure?

2) How does a currency swap help in limiting transactional exposure?

© BrainMass Inc. brainmass.com October 16, 2018, 4:50 pm ad1c9bdddf
https://brainmass.com/business/international-finance/international-finance-and-transactional-exposure-37732

Solution Preview

Please see response attached (also presented below), as well as two other relevant articles that you may find helpful. Good luck with your studies and take care.

RESPONSE:

1. How does hedging help in limiting a company's transactional exposure?

Transactional Exposure is the risk of loss from adverse foreign exchange movements that affect sterling values of Balance Sheet items held overseas and past transactions in foreign currency. Hedging can limit or manage a company's transactional exposure. It is the use of investments to manage commercial risk (i.e., transactional exposure, etc.), or to minimize a potential loss to an existing position or known commitment.

How? By using two counterbalancing investment strategies, any losses caused by price fluctuations are thus minimized. For example, a trader in commodities buys an amount of one particular item. At the same time he also makes a contract to sell an amount of a similar item at a later date. Thus if the price of the item he has bought falls, he can still recover money by selling the similar item at the earlier, higher price. (http://www.lse.co.uk/financeglossary.asp?searchTerm=&iArticleID=1795&definition=transactional_exposure).

See attachment ...

Solution Summary

This solution explains how hedging and currency swap help in limiting a company's transactional exposure. It is also supplemented with two highly informative articles.

$2.19
Similar Posting

Cuba and International Finance

Prepare a word document of the genreal background information regarding the country Cuba (e.g., risk elements, with more emphasis on recent events). In a minimum of 500 words, be sure to include the following: regional transaction exposure and approach; regional translation exposure and approach; and regional operating exposure and other descriptive events or information.

Must have a minimum of 4 reference including the book Multinational Finance by Moffett, Stonehill, & Eiteman.

View Full Posting Details