1.Why is an exporter that is to be paid in six months in a foreign currency worried about fluctuating foreign exchange rates?
2.Are there ways in which this exporter can protect itself? If so, what are they?
3.How does the credit or money market hedge work?buy protection on the credit names through credit default swaps. Money markets do not have price risk to them as they are very short dated instruments. They have re-investment risk to them which i am not sure that you are refering to. Credt default swaps are over the counter instruments and are not available to retail investors though. You can buy treasuries or be overweight treasuries if you believe that credit market would preform not that great
4.Why is acceleration or delay of payments more useful to an IC than to smaller, separate companies?IC... integrated chips? Making payments? Organizing into companies?
5.How would you accomplish exposure netting with currencies to two countries that tend to go up and down together in value?
6.Why is the price adjustment device more useful to an IC than to smaller, separate companies?Price adjustment devices are in and of themselves expensive, the potential theoretical gain (defined as sigma-t) versus the actual theoretical costs (defined as sigma-c) will always be higher for IC than to smaller companies. the larger the theoretical gain (sigma-t), the closer it gets to the limit value of of the dervitave of the price adjustment L(lambda)amount of price adjustment / sigma-c * sigma-tsmaller companies have lower derivative sales, and lower L(lambda) values, hence their price adjustment L(lambda)amount of price adjustment / sigma-c * sigma-t will always be lower
7.Some argue that translation gains or losses are not important so long as they have not been realized and are only accounting entries. What is the other side of that argument?
8.Is the parallel loan a sort of swap? How does it work?
9.How and why would a seller make a sale to a buyer that has no money the seller can use?
10.Developed country partners in countertrade contracts have had problems with quality and timely delivery of goods from the developing country partners. How are they trying to deal with those problems?
.
1. If an exporter agrees to sell his products today in the EU when one Euro equals $1.39 in U.S. dollars, he's concerned that six months from now, the Euro might rise and only be worth, say, $1.35 in U.S. dollars. Four cents isn't much -- until you multiply it by thousands.
2. The exporter could set a fixed amount of dollars the buyer will pay him. That way he'll get the money he expects even though the dollar may be worth less in Euros in six months.
OK. I answered your first two questions. Now it's your turn. We'll be glad to critique your answers if you post them here.
could you just give me some web sites please
1. An exporter that is to be paid in a foreign currency is worried about fluctuating foreign exchange rates because it can affect the value of the payment they receive. If the value of the foreign currency increases relative to their local currency, they may receive less money than expected. Conversely, if the value of the foreign currency decreases, they may receive more money than expected. These fluctuations can impact the profitability of the exporter's business.
2. There are several ways in which an exporter can protect itself from fluctuating foreign exchange rates. One option is to enter into a forward contract, where the exporter agrees to sell the foreign currency at a predetermined exchange rate on a future date. This can help lock in a specific exchange rate, reducing the risk of adverse rate movements. Another option is to use currency options, which give the exporter the right (but not the obligation) to buy or sell a currency at a predetermined rate within a specific time period. This provides flexibility in managing exchange rate risk. Additionally, exporters can consider using currency swaps, where they exchange one currency for another with a counterparty in order to hedge against exchange rate fluctuations.
3. The statement regarding credit or money market hedge is not clear enough to provide a specific step-by-step explanation. It mentions buying protection on credit names through credit default swaps and buying treasuries, but it is not clear how they relate to each other or how they act as a hedge. Please provide more specific information or clarify your question for a more accurate response.
4. It is unclear what IC refers to in this context, but assuming it stands for "integrated chips" or a similar term related to technology or manufacturing, the acceleration or delay of payments can be more useful to an IC than to smaller, separate companies. This is because ICs often have complex supply chains and longer production cycles. Accelerating or delaying payments can help synchronize cash flows with production cycles and manage working capital more effectively. Smaller, separate companies may not have as many dependencies or longer production cycles, so the benefits of payment acceleration or delay may be less significant.
5. Exposure netting with currencies of two countries that tend to go up and down together in value can be accomplished by offsetting the exposure of one currency with the exposure of the other currency. For example, if a company has both assets and liabilities in two currencies that tend to move together, the company can net these positions by subtracting the value of the liabilities in one currency from the value of the assets in the same currency. This reduces the overall exposure to fluctuations in these currencies and helps mitigate the impact of exchange rate movements.
6. The price adjustment device can be more useful to an IC than to smaller, separate companies because ICs often have larger sales volumes and complex supply chains. Price adjustment devices, such as contracts with price escalation clauses or formulas, allow ICs to adjust prices based on factors like inflation or changes in input costs. This can help mitigate the risk of cost increases or inflationary pressures, which can have a significant impact on profitability for companies with large volumes and complex operations. Smaller, separate companies may have less bargaining power or fewer resources to negotiate and enforce price adjustments.
7. The other side of the argument regarding translation gains or losses is that they can impact the financial position and performance of a company, even if they are not realized. Unrealized translation gains or losses can affect the reported equity and financial ratios, which can influence how the company is perceived by investors, creditors, and other stakeholders. Additionally, these gains or losses may signal potential future cash flow volatility or risk, which can impact the company's valuation and ability to attract capital. Therefore, some argue that it is important to consider and manage translation gains or losses, even if they are only accounting entries.
8. A parallel loan is not a swap, but it can be seen as a type of loan agreement between two parties in different countries. In a parallel loan, both parties lend funds in their respective domestic currencies to each other, effectively creating a loan agreement that mirrors each other's obligations. This allows both parties to acquire funding in their own currency and avoid the need for currency exchange. The terms of the loan, including interest rates and repayment schedules, are negotiated between the parties to meet their specific needs.
9. In certain cases, a seller may make a sale to a buyer who has no money that the seller can use in order to achieve other objectives. For example, the seller may have strategic reasons for entering a specific market or establishing a business relationship with the buyer. The seller may believe that providing goods or services to the buyer will lead to future revenue opportunities or other benefits. Additionally, the seller may have alternative ways of monetizing the sale, such as obtaining financing or engaging in financial transactions using the sale contract as collateral.
10. Developed country partners in countertrade contracts are attempting to address problems with quality and timely delivery of goods from developing country partners through various strategies. These may include implementing quality control mechanisms, conducting regular inspections or audits, establishing clear performance metrics and benchmarks in the contract, ensuring proper contract management and monitoring, offering training or capacity-building programs for the developing country partners, and fostering closer collaboration and communication between the parties involved. Additionally, recourse options or penalties for non-compliance can be included in the contract to incentivize timely and quality delivery of goods.
1. An exporter that is to be paid in a foreign currency in six months is worried about fluctuating foreign exchange rates because the value of the foreign currency may change relative to their own domestic currency. If the foreign currency depreciates, it means that when the exporter converts their foreign currency earnings back to their domestic currency, they will receive fewer units of their domestic currency than they originally expected. This can result in a loss for the exporter.
2. There are several ways in which the exporter can protect itself from fluctuating foreign exchange rates. One common method is to use a forward contract, which is an agreement to buy or sell a specified amount of foreign currency at a predetermined exchange rate in the future. This allows the exporter to lock in a specific exchange rate, providing certainty about the future value of their foreign currency earnings.
Another method is to use options contracts, which give the exporter the right, but not the obligation, to buy or sell foreign currency at a predetermined exchange rate in the future. Options provide flexibility, as the exporter can choose whether to exercise the option or not depending on the future exchange rate.
Additionally, the exporter can use hedging strategies such as diversifying their sales to different countries or using natural hedging by matching their foreign currency expenses with their foreign currency earnings.
3. It seems there may be a confusion in the question as it mentions credit or money market hedge but then goes on to mention credit default swaps and treasuries. Credit default swaps are financial instruments used for hedging credit risk, not foreign exchange risk. Treasuries, on the other hand, are government-issued securities used for investment purposes.
4. The question is not clear about what IC refers to, but assuming it refers to a larger integrated company, the acceleration or delay of payments can be more useful to them compared to smaller, separate companies for several reasons. Larger integrated companies often have more financial resources and flexibility, allowing them to manage their cash flows more effectively. They may have access to multiple sources of financing or stronger relationships with financial institutions, giving them more options to accelerate or delay payments if necessary.
5. Exposure netting with currencies of two countries that tend to go up and down together in value can be challenging. One approach is to identify other currencies that have a negative correlation with these two countries. By holding a position in a currency that moves in the opposite direction to the two countries, the exporter can potentially offset the risk. However, it is important to note that correlation can change over time, so ongoing monitoring and analysis are necessary.
6. The question is not clear about what the price adjustment device refers to, but assuming it refers to some mechanism for adjusting prices, it may be more useful to an IC (integrated company) compared to smaller, separate companies due to economies of scale. Integrated companies often have larger operations, which can benefit from more efficient price adjustment mechanisms. They may have the resources and infrastructure to implement and manage such devices effectively.
7. The other side of the argument is that even though translation gains or losses may not have been realized, they still represent a change in the value of the company's assets or liabilities. These changes can impact the financial position and performance of the company. Furthermore, when the gains or losses are eventually realized (e.g., through the sale of the foreign subsidiary), they will impact the company's cash flows and profitability.
8. A parallel loan is not a swap but a type of borrowing arrangement. In a parallel loan, two companies from different countries each provide a loan in their respective currencies to a borrower in another country. The loans are then swapped between the two companies, allowing the borrower to obtain the desired mix of currencies. This allows the borrower to mitigate foreign exchange risk by matching its loan obligations with its revenue streams in different currencies.
9. A seller may make a sale to a buyer that has no money the seller can use for various reasons. One possibility is that the buyer may have alternative means of payment, such as assets that can be used as collateral or access to financing from another source. Another reason could be that the seller has confidence in the buyer's ability to secure the necessary funds by a later date. In these situations, the seller may be motivated by the potential future benefits of the sale or the relationship with the buyer.
10. Developed country partners in countertrade contracts are trying to deal with problems of quality and timely delivery of goods from developing country partners through various measures. These include implementing stricter quality control measures, conducting regular inspections and audits, providing technical assistance and training to the developing country partners, establishing clear contractual terms and penalties for non-compliance, and building long-term relationships with reliable partners. The goal is to ensure that the goods delivered meet the required quality standards and are delivered on time, mitigating the risks associated with countertrade arrangements.