Management and Control of Foreign Exchange Risk

Examining the theory and practice of foreign exchange risk management, this work offers a rigorous set of operational guidelines within which foreign exchange risk can be: hedged consistently both across different risk situations and over time; integrated tightly with other types of financial risk such as interest rate and commodity price risk; and managed consistently with the firm's overall strategic plans so that the technical, financial engineering dimensions of risk management are integrated fully with strategic management. The book starts with an in-depth discussion of the valuation of spot and forward foreign exchange rates, currency futures and options, swaps and other foreign exchange derivative products. Part II provides a framework for generating foreign exchange rate forecasts. Assessment of a multinational corporation's exposure to foreign exchange risk is discussed in Part III. Finally, Part IV reviews how to eliminate or mitigate cash flow losses that may result from transaction exposure to foreign exchange risk. Each chapter is followed by case studies and problem sets. An instructor's manual is available upon request from the publisher.

Table of Contents:
1 Determination of Spot Exchange Rates.- I. Some First Principles.- II. Floating Exchange Rates.- III. Stabilized Exchange Rates.- IV. Controlled Exchange Rates.- Summary and Conclusions.- Annotated Bibliography.- Problems.- Case Study 1.1: Hippocrates Inc..- 2 Determination of Forward Exchange Rates.- I. Forward Exchange Contracts.- II. Interest Rate Parity Theorem.- III. Modern Theory.- Summary and Conclusions.- Selected Bibliography.- Problems.- Case Study 2.1: Bookwell’s Financing Choices.- 3 Currency Futures, Options, Derivatives, and Swaps.- I. Currency Futures.- II. Currency Options.- III. Derivatives and Zero-Premia Options.- IV. Currency Swaps.- Summary and Conclusions.- Selected Bibliography.- Problems.- Case Study 3.1: Daewoo’s Unorthodox Funding Strategy.- Case Study 3.2: Intercomex: Exchange Risk in Coffee Trading.- 4 Forecasting Floating Exchange Rates.- I. Market-Based Forecasts.- II. Model-Based Forecasts: Technical vs. Econometric Modeling Approaches.- Summary and Conclusions.- Selected Bibliography.- Problems.- 5 Forecasting Pegged Yet Adjustable Exchange Rates.- I. Step 1: Assessing the Balance of Payments Outlook.- II. Step 2: Measuring the Magnitude of Required Adjustment.- III. Step 3: Timing Adjustment Policies.- IV. Step 4: Anticipating the Nature of Adjustment Policies.- Summary and Conclusions.- Appendix 5.A: The Purchasing Power Parity Hypothesis.- Selected Bibliography.- Problems.- Case Study 5.1: Morris De Minas.- 6 Accounting Exposure to Foreign Exchange Risk.- I. Transaction Exposure.- II. Translation Exposure.- Summary and Conclusions.- Selected Bibliography.- Problems.- 7 Economic Exposure to Foreign Exchange Risk.- I. A Taxonomy of Economic Exposures.- II. Inflation and Profitability.- III. Devaluation and Profitability.- IV.Towards an Operational Measure of Economic Exposure.- Summary and Conclusions.- Annotated Bibliography.- Problems.- Case Study 7.1: Euclides Engineering, Ltd..- Case Study 7.2: British Materials Corporation.- 8 Exchange Risks in International Trade.- I. The Mechanics of Hedging Transaction Exposures.- II. Eliminating Foreign Exchange Risk in Long-term Contracts.- III. Exchange Risk in International Bidding.- IV. The Optimal Hedging Decision.- Summary and Conclusions.- Appendix 8. A: An Introduction to the Theory of Expected Utility for Foreign Exchange Risk Management.- Selected Bibliography.- Problems.- Case Study 8.1: Whirlpool Appliances, Inc..- 9 Optimal Currency Denomination in Long-Term Debt Financing.- I. Expected Cost of Foreign Currency Financing.- II. Risk-adjusted Cost of Foreign Debt Financing.- Summary and Conclusions.- Selected Bibliography.- Problems.- Case Study 9.1: BC Hydro.- 10 Hedging Translation Exposure.- I. The Mechanics of Contractual Hedging.- II. The Mechanics of Financial Hedging.- III. Hedging in a Multicurrency World: A Risk-Preference Framework.- Summary and Conclusions.- Selected Bibliography.- Problems.- Case Study 10.1: Gillette International Finance.- 11 Exchange Rates and the International Control Conundrum.- I. The International Control Conundrum.- II. Mapping the Currency Space.- III. Value-Based Contingent Budgeting with Imperfect Currency Pass Through.- IV. Estimating Exchange Rate Pass Through.- Summary and Conclusions.- Selected Bibliography.- Case Study 11.1: Multiquimica Do Brasil.- Index of Authors.- Index of Subjects.- Solutions to Selected Problems.- About the Author.

About the Author :
Laurent L. Jacque is a Professor of International Finance and Banking and Director of the Program of International Business Relations at the Fletcher School (Tufts University). He is also Professor of Finance and International Business at the HEC School of Management (France).