Question:
You have been appointed as the treasurer of Dockers International, an automobile firm with many subsidiaries abroad. The management of Dockers International is relatively non-finance people and as one of your task, you are expected to advise management of the potential currency exposure the firm might be facing and on the management of currency risk.
a) Explain management the difference between transaction and translation risk, using appropriate numerical examples.
b) One of the directors has heard that transaction exposure will equally be managed externally by a forward hedge or internally by a money market hedge. He is very confused about these things. Illustrate to him how these two hedging strategies differ and make an evaluation of both methods for him.
c) In the case of transaction risks, critically explain how one can use forward-spot swap deals and forward-forward deals to manage the risk. How do these differ from the use of futures contracts?