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Economics: Difference between revisions
→International Economics: final notes of week 41
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== Week 41 - Exchange rate risk == | == Week 41 - Exchange rate risk == | ||
== Week 41 - Risk and risk management == | == Week 41 - Risk and risk management == | ||
'''[[w:Risk]]''' and '''[[w:risk management]]''' | == Week 41 - Risk and risk management == | ||
'''[[w:Risk|Risk]]''' and '''[[w:risk management|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''' 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 ) | '''Risk management''' is the identification, assessment, and prioritization of [[w:risk|risks|]] (defined in [[w:ISO 31000|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]] | '''Managing [[w:foreign exchange risk|foreign exchange risk]]'' and [[w:exposure|exposure]] | ||
* using international [[w:financial market]] to deal with the special opportunities and risks of international trade and investments | * using international [[w:financial market|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 | * foreign exchange exposure – a measure of the sensitivity of changes in [[w:domestic|domestic]] [[w:currency|currency]] values of [[w:assets|assets]], [[w:liabilities|liabilities]], or [[w:operating income|operating income]]s to unanticipated changes in [[w:exchange rate|exchange rate]]s | ||
* both domestic and foreign financial instruments and incomes can face foreign exchange exposure | * both domestic and foreign financial instruments and incomes can face foreign exchange exposure | ||
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* exchange rate exposure: the amount at risk | * exchange rate exposure: the amount at risk | ||
* international accounting principles: in '''[[w:financial statements]]''' accounting exposure – real exposure is the underlying exposure | * international accounting principles: in '''[[w:financial statements|financial statements]]''' accounting exposure – real exposure is the underlying exposure | ||
* the effect of exchange rates on sales and operating profitability: operating 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]]''' | * management of exposure and risk: means of dealing with risk and exposure – '''[[w:hedging|hedging]]''' | ||
==== Risk management ==== | ==== 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 | * it is possible to use [[w:borrowing|borrowing]], [[w:investing|investing]], and the [[w:spot exchange market|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) | * 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) | ||
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* 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) | * 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) | * [[w:hedging|hedging]] via [[w:currency of invoicing|currency of invoicing]] – by [[w:invoicing|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 [[w:mixed-currency invoicing|mixed-currency invoicing]] – [[w:composite currency|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 | * hedging via selection of supplying country: sourcing – use domestic inputs or inputs from EMU-area | ||
* Use '''[[w:forwards]]''' or '''[[w:currency option]]s'' | * Use '''[[w:forwards|forwards]]''' or '''[[w:currency option|currency option]]s'' | ||
== Week 42 - Presentation == | == Week 42 - Presentation == | ||