(BQ) Part 2 book "International money and finance" has contents: Foreign exchange risk and forecasting, financial management of the multinational firm, international portfolio investment, direct foreign investment and international lending, determinants of the balance of trade,.and other contents. | SECTION 3 Risk and International Capital Flows 8. 9. 10. 11. Foreign Exchange Risk and Forecasting Financial Management of the Multinational Firm International Portfolio Investment Direct Foreign Investment and International Lending 151 167 185 201 This page intentionally left blank CHAPTER 8 Foreign Exchange Risk and Forecasting International business involves foreign exchange risk since the value of transactions in different currencies will be sensitive to exchange rate changes. Although it is possible to manage a firm’s foreign-currencydenominated assets and liabilities to avoid exposure to exchange rate changes, the benefit involved is not always worth the effort. The appropriate strategy for the corporate treasurer and the individual speculator will be at least partly determined by expectations of the future path of the exchange rate. As a result, exchange rate forecasts are an important part of the decision-making process of international investors. In this chapter, we first consider the issue of foreign exchange risk, which is the presence of risk that arises from uncertainty regarding the future exchange rate; this uncertainty makes forecasting necessary. If future exchange rates were known with certainty, there would be no foreign exchange risk. TYPES OF FOREIGN EXCHANGE RISK One problem we encounter when trying to evaluate the effect of exchange rate changes on a business firm arises in determining the appropriate concept of exposure to foreign exchange risk. We can identify three principal concepts of exchange risk exposure: 1. Translation exposure. This is also known as accounting exposure. It is the difference between foreign-currency-denominated assets and foreign-currency-denominated liabilities. 2. Transaction exposure. This is exposure resulting from the uncertain domestic currency value of a foreign-currency-denominated transaction to be completed at some future date. 3. Economic exposure. This is exposure of the firm’s value to changes
