IGNOU IBO 6 2017 2018 - Discuss in detail various techniques of transaction exposure managemen

Question

Discuss in detail various techniques of transaction exposure management.

29 Aug 2017

Answer :

Word Count : 694

Financial Techniques for Managing Transaction Exposure

The following are the financial techniques for hedging transaction exposure:

Forward Contracts

If a firm is required to pay a specific amount of foreign currency in the future, it can enter into a contract that fixes the price for the foreign currency for a future date. This eliminates the chances of suffering due to currency fluctuations.

Futures Contracts

Futures contracts are similar to ‘forward contracts’. However, futures contracts have standardized and limited maturity dates, initial collateral and contract sizes.

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Transaction Exposure

Table of Contents [hide]

1 Meaning Of Transaction Exposure

2 Explanation with Example

3 Financial Techniques for Managing Transaction Exposure

3.1 Forward Contracts

3.2 Futures Contracts

3.3 Money Market Hedge

3.4 Options

4 Operational Techniques for Managing Transaction Exposure

4.1 Risk Shifting

4.2 Currency Risk Sharing

4.3 Leading and Lagging

4.4 Reinvoicing Centers

5 Conclusion

Meaning Of Transaction Exposure

Transaction exposure is the risk incurred due to the fluctuations in exchange rates before the contract is settled. The foreign exchange rate that changes in cross-currency transactions can adversely affect the involved parties. Once a cross-currency contract has been framed, and a specific amount of money and quantity of goods is fixed, exchange rate fluctuations can change the value of the contract. However, a company that has agreed to a contract but not yet settled

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