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Economics: Difference between revisions
draft one on today's notes ( contains some redlinks ) will work on it.. I have a good feeling about this course in terms of the amount of information mentioned in it
(→Week 40 - Exchange rate determination: adding notes for week 40) |
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== Week 41 - Exchange rate risk == | == Week 41 - Exchange rate risk == | ||
== Week 40 - Risk and risk management == | |||
'''[[w:Risk]]''' and '''[[w:risk management]]''' | |||
'''Risk''' is the potential of loss (an undesirable outcome, however not necessarily so) resulting from a given action, activity and/or inaction. ( Wikipedia ) | |||
'''Risk management''' is the identification, assessment, and prioritization of [[w:risk|risks]] (defined in [[w:ISO 31000]] as ''the effect of uncertainty on objectives'', whether positive or negative) followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events ( Wikipedia ) | |||
'''Managing [[w:foreign exchange risk]]'' and [[w:exposure]] | |||
* using international [[w:financial market]] to deal with the special opportunities and risks of international trade and investments | |||
* foreign exchange exposure – a measure of the sensitivity of changes in [[w:domestic]] [[w:currency]] values of [[w:assets]], [[w:liabilities]], or [[w:operating income]]s to unanticipated changes in [[w:exchange rate]]s | |||
* both domestic and foreign financial instruments and incomes can face foreign exchange exposure | |||
* exchange rate risk: variability of domestic-currency values of assets, liabilities, and incomes | |||
* exchange rate exposure: the amount at risk | |||
* international accounting principles: in '''[[w:financial statements]]''' accounting exposure – real exposure is the underlying exposure | |||
* the effect of exchange rates on sales and operating profitability: operating exposure | |||
* management of exposure and risk: means of dealing with risk and exposure – '''[[w:hedging]]''' | |||
==== Risk management ==== | |||
* it is possible to use [[w:borrowing]], [[w:investing]], and the [[w:spot exchange market]] to achieve the same result as would be obtained by using the forward market | |||
* importer that must pay its currency trade loan within 30 days: borrow in home currency (€, 30 days), buy the foreign exchange on the spot market ($), invest in foreign exchange (in New York, for 30 days), use foreign currency for paying the trade loan ($, after 30 days), and repay the domestic currency debt (€, after 30 days) | |||
* exporter that receives a foreign-currency payment after 60 days: borrow in the foreign currency that is to received ($, 60 days), sell the borrowed foreign currency spot ($ à €), invest or otherwise employ domestic currency at home (€, 60 days), receive the payment from abroad ($ after 60 days), and repay the foreign currency debt with export earnings ($ after 60 days) | |||
* [[w:hedging]] via [[w:currency of invoicing]] – by [[w:invoicing]] in own currency: no transaction risk nor exposure but the economic exposure still remains (if exchange rates change, the customer abroad faces changed prices, and according to price elasticity, the quantity demanded will change) | |||
* hedging via [[w:mixed-currency invoicing]] – [[w:composite currency]] (SDR), currency baskets (e.g. ½ dollars, ½euros) or ”cocktails”, usually this results in risk and exposure reduction since they offer some diversification risk (if the value of dollar goes up, usually the value of euro goes down) | |||
* hedging via selection of supplying country: sourcing – use domestic inputs or inputs from EMU-area | |||
* Use '''[[w:forwards]]''' or '''[[w:currency option]]s'' | |||
== Week 42 - Presentation == | == Week 42 - Presentation == | ||