QUESTION
You have been appointed as the head of the treasury of an international firm with many subsidiaries abroad. The management of this multinational consists relatively
of non-finance people and as one of your tasks, you are expected to advise management of the potential currency exposure that the firm might face and on the
management of currency risk
a) Explain management the difference between transaction, translation and economic risks, using appropriate numerical examples
b) Explain to one of the directors how the risk can equally be managed externally by a forward hedge or internally by a money market hedge
c) The same director also wants to know the implications of hedging through futures market. How do they compare with forwards?
d) Another director has heard that in the case of unknown settlement dates, forward options and forward swaps may be used. Discuss these instruments fully