Application Air Products Loses Twice In May 2000, Air Products & Chemicals Inc. announced a $300 million after-tax charge. The bulk of this charge came about from currency losses associated with the acquisition of British pounds to be used in a failed attempt to buy BOC Group PLC. After Air Products bought the pounds, the […]
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Using Options to Hedge Bids. Until recently, GE, or any company that bid on a contract denominated in a foreign currency and was not assured of success, would be unable to resolve its foreign exchange risk dilemma. The advent of currency options has changed all that. Specifically, the solution to managing its currency risk in
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Use of a Currency Cylinder to Hedge GE’s Receivable Cross-Hedging Hedging with futures is very similar to hedging with forward contracts. However, a firm that wants to manage its exchange risk with futures may find that the exact futures contract it requires is unavailable. In this case, it may be able to cross-hedge its exposure
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Currency Risk Sharing In addition to, or instead of, a traditional hedge, General Electric and Lufthansa can agree to share the currency risks associated with their turbine blade contract. Currency risk sharing can be implemented by developing a customized hedge contract embedded in the underlying trade transaction. This hedge contract typically takes the form of
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Application Weyerhaeuser Quotes a Euro Price for Its Lumber Weyerhaeuser is asked to quote a price in euros for lumber sales to a French company. The lumber will be shipped and paid for in four equal quarterly installments. Weyerhaeuser requires a minimum price of $1 million to accept this contract. If PF is the
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Forward Market Hedge In a forward market hedge, a company that is long a foreign currency will sell the foreign currency forward, whereas a company that is short a foreign currency will buy the currency forward. In this way, the company can fix the dollar value of future foreign currency cash flow. For example, by
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Managing Translation Exposure Firms have three available methods for managing their translation exposure: (1) adjusting fund flows, (2) entering into forward contracts, and (3) exposure netting. The basic hedging strategy for reducing translation exposure shown in Exhibit 10.5 uses these methods. Essentially, the strategy involves increasing hard currency (likely to appreciate) assets and decreasing soft
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Application The Luck of the Irish Eludes Allied Irish Banks In February 2002, Allied Irish Banks announced that a rogue trader at its U.S. unit lost $750 million through unauthorized foreign exchange trades. Allied said John Rusnak, a foreign exchange dealer at its U.S. unit Allfirst tried to disguise huge losses through fictitious foreign exchange
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Centralization versus Decentralization In the area of foreign exchange risk management, there are good arguments both for and against centralization. Favoring centralization is the reasonable assumption that local treasurers want to optimize their own financial and exposure positions, regardless of the overall corporate situation. An example is a multibillion-dollar U.S. consumer-goods firm that gives its
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Exposure Netting. Exposure netting involves offsetting exposures in one currency with exposures in the same or another currency, where exchange rates are expected to move in a way such that losses (gains) on the first exposed position will be offset by gains (losses) on the second currency exposure. This portfolio approach to hedging recognizes that