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Question
Discuss the risks associated with transaction exposure and how to hedge them.
The risk that transaction exposure describes is a movement in the foreign exchange market against the firm. First are the centralized ways of meeting transaction exposure. Leading and lagging is one approach, and exposure netting is another. Hedges and swaps also offer protection on transaction exposure. A forward market hedge involves selling the firm's foreign currency receivables forward for its home currency, matching time forward to the due date of the receivable. A currency option hedge allows the company to choose to exercise the option, and so allows it to benefit from currency markets shifts in its favor. Money market hedges are another approach to hedging. They match the balance sheet asset with a liability in the same currency. Swap contracts are also used to hedge transaction exposure.
Feedback: Each of these points can be further developed with a definition.
Answer
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