Transaction risk refers to the possibility of foreign exchange gains and losses due to exchange rate changes in foreign currency transactions that have been reached but have not yet been settled. It measures the possibility of foreign exchange gains and losses caused by changes in a specific exchange rate. It measures the likely impact of a specific exchange rate change on the value of an agreed foreign currency transaction.
Transaction risk management methods include:
(1) Forward Market Hedging (ForwardMarketHedge) .
Use the forward foreign exchange market to prevent possible losses due to exchange rate changes by signing forward foreign exchange contracts with offsetting properties to achieve the purpose of preserving value. A forward foreign exchange contract reflects a contractual relationship that stipulates that one party will deliver a certain amount of a certain currency to the other party at a certain exchange rate on a specific date in the future in exchange for a specific amount of another currency. As for the source of funds to fulfill the contract, it may be existing or business receivables or they may not be available yet. When necessary, they can be purchased in the spot foreign exchange market. A completely certain cash flow value can be obtained through forward market hedging, but it may not be the maximized value. The prerequisite for using the forward market for hedging is that there must be a forward foreign exchange market. However, in the real world, not all currencies have a forward foreign exchange market.
(2) Money market hedging (MoneyMardetHedge).
Through short-term borrowing in the money market, we establish matching or offsetting claims and debts to offset the exchange rate changes involved in foreign currency receivables and payables. purpose of risk. Similar to forward market hedging, money market hedging also involves a contract and the source of funds to fulfill the contract. However, this is a loan agreement, that is, a company seeking money market hedging needs to borrow a currency from a currency market, exchange it for another currency in the spot foreign exchange market, and invest it in another currency market. . As for the source of funds for the performance of the contract, it is nothing more than business receivables or receivables that have not yet been secured. When necessary, they can be purchased in the spot foreign exchange market. If it belongs to the former, then money market hedging is "covered"; if it belongs to the latter, money market hedging has no hedging and still carries certain risks. Money market hedging involves two processes: borrowing, exchange and investment (i.e. lending) and two money markets, its value-preserving mechanism lies in the relationship between the interest rate difference between the two currency markets and the premium (discount) of the forward exchange rate.
(3) Option market hedging (OptionMarketHedge).
According to the prediction of the trend of foreign exchange rate changes, in the foreign exchange options market, purchase call or put options, sit back and watch the changes in the foreign exchange market, and decide to exercise or abandon the options in order to Achieve the purpose of preserving value and having profit opportunities. Since the option gives the buyer a right rather than an obligation, the buyer can exercise the option when the exchange rate changes are favorable, and give up the option when the exchange rate changes are unfavorable. This way, the buyer can sit back and watch the sky, ensuring the bottom line of income and expecting unlimited profits. If a multinational company cannot determine whether or when future cash flows will occur, then option market hedging is the most ideal hedging tool.
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