Foreign Exchange and Trade Risk, 3^rd Ed.

Financial Strategy -- Unit 8

The Open University

Publisher: The Open University, 2000

ISBN: 0-7492-9787-5

Synopsis:

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Table of Contents:

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1. Introduction
• Aims and objectives of the unit
2. What is Foreign Exchange Risk?
• 2.1 The Nature of Foreign Exchange Exposure
• Transaction exposure
• Translation exposure
• Economic exposure
• 2.2 Transaction Exposure
• 2.3 Translation Exposure
• 2.4 Economic Exposure
• 2.5 Measurement of Foreign Exchange Exposure
• Measurement of transaction exposure
• Measurement of economic exposure
3. The Market for Foreign Exchange
• 3.1 What and Where is the Foreign Exchange Market?
• 3.2 The Size of the World Currency Markets
• 3.3 Why and for Whom Does the Forex Market Exist?
4. The Mechanics of Foreign Exchange
• 4.1 Spot Rates
• 4.2 Cross Rates
• 4.3 Forward Exchange Rates
• 4.4 How to Use the Spot and Forward Exchange Markets
• The advantages and disadvantages of using forward contracts
5. Forecasting Foreign Exchange Rates
• 5.1 Fundamental Approaches to Forecasting Exchange Rates
• Four-way equivalence model — or parity conditions
• Purchasing power parity (PPP)
• The Fisher effect
• The interest rate parity theory (IRP)
• Expectations theory
• Balance of payments approach
• Monetarist approach
• 5.2 Technical Analysis
• 5.3 How Good is Exchange Rate Forecasting?
• 5.4 Currency Histograms
6. Forex Risk Management Within the Organisation
• 6.1 The Organisation of Exposure Management
• 6.2 Description of Management Techniques
• Arguments for not hedging
7. Techniques for Exposure Management
• 7.1 Techniques Towards the ‘Internal’ End of the Scale
• Technique 1 Exposure netting
• Technique 2 Matching
• Technique 3 Pricing adjustments
• 7.2 Techniques Closer to the ‘External’ End of the Scale
• Technique 4 Exchange risk guarantees
• Technique 5 Long-term borrowing in foreign currencies
• Technique 6 Financial instruments
8. Credit Risk and Settlement Risk
• 8.1 Funds Transfer and Settlement Risk
• 8.2 Credit Analysis
• 8.3 Credit Risk Tools for International Trade
• Letters of credit
• Letters of guarantee

• Appendix: Proof of Forward Margin Formula