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international investment

Demonstrate the use of derivatives as an appropriate hedging mechanism with international investment decisions.

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In international investment decision organization can use derivatives for risk management. Basically the organization can have following type of exchange exposure and can use the derivatives accordingly:

I Translation exposure
is simply the difference between exposed assets and exposed liabilities. The controversies among accountants' center on which assets and liabilities are exposed and on when accounting-derived foreign exchange gains and losses should be recognized (reported on the income statement). A crucial point to realize in putting these controversies in perspective is that such gains or losses are of an accounting nature-that is, no cash flows are necessarily involved.
Firms have three available methods for managing their translation exposure: (1) adjusting fund flows, (2) entering into forward contracts, and (3) exposure netting.
 Adjusting the fund flows
Essentially, the strategy involves increasing hard currency (likely to appreciate) assets and decreasing soft currency (likely to depreciate) assets, while simultaneously decreasing hard currency liabilities and increasing soft currency liabilities.
For example, if a devaluation appears likely, the basic hedging strategy will be executed as follows: Reduce the level of cash, tighten credit terms to decrease accounts receivable, increase LC borrowing, delay accounts payable, and sell the weak currency ...

Solution Summary

This job exaimines international investment.