Corporate Foreign Exchange Risk Management

Description

A practical and accessible guide that demystifies ForEx risk for managers in all areas of business   Virtually any organisation active in the global economy is impacted by fluctuations in foreign exchange (FX or ForEx) markets. Managers need to understand this increasingly complex issue and measure their firm's exposure to risk. Corporate Foreign Exchange Risk Management is an in-depth yet accessible guide on effective ForEx exposure management. Designed for professionals responsible for managing a profit & loss or balance sheet influenced by ForEx fluctuations, it enables risk managers to navigate the interconnected worlds of financial management and economics.   This innovative guide integrates academic discussion of the economics of risk management decisions and pragmatic advice for various situations in which performance measures affected by accounting standards are paid considerable attention. Readers are provided with the tools and knowledge required to handle a broad range of issues related to ForEx risk management. Clear, non-technical chapters demystify concepts that often appear complicated and confusing to managers. Written by globally-recognised experts in corporate finance, risk management and international business, this book: * Employs a reader-friendly narrative style to explain complex concepts * Provides a clear, actionable risk management strategy which can be used in a variety of businesses * Places all concepts in relatable, real-world contexts * Explains important academic research to practitioners in plain English * Includes effective pedagogical tools and explanations, straightforward examples and end-of-chapter summaries which highlight key points   Corporate Foreign Exchange Risk Management is a must-read for any manager who deals with corporate exposure to ForEx risk, as well as analysts wishing to better understand the relation between corporate performance and ForEx fluctuations and students of corporate risk management. Corporate Foreign Exchange Risk Management Contents Acknowledgements About the Authors Preface Key Terms and Abbreviations Introduction Two Stylized Facts About Exchange Rates A Definition of FXRM Quoting Exchange Rates Outline of the Book Further Reading 1 Why Manage Foreign Exchange Risk? From Individual Risk Management to Corporate Risk Management The Case for FXRM: Cash Flow Hedging The Case for FXRM: Protecting Financial Ratios The Case for FXRM: Managing Net Income Variability Key Chapter Takeaways Further Reading 2 Commercial Exposure to FX The Basics of Transaction Exposure Forecasting Net Exposures A Simple Model of Commercial Exposure Competitive Exposures The Mystery of the ‘Underlying’ Currency Shortcomings of the Bottom-up Method The Statistical Method of Exposure Measurement Key Chapter Takeaways Further Reading 3 Net Income Exposure to FX The Basics of Translation Exposure Monetary vs Non-monetary Assets The Issue of Functional vs Transaction Currency The Exposure Matrix External Exposures on Internal Transactions Key Chapter Takeaways Further Reading 4 Balance Sheet Exposure to FX The Basics of Non-monetary Assets and Liabilities Reconciling the Exposure Matrix with Shareholders’ Equity Reconciling Internal Transactions with Shareholder’s Equity Reconciling Translation of Income with Shareholder’s Equity The Currency Translation Reserve: A Summary Key Chapter Takeaways Further Reading 5 FX Derivatives Explained The Basics of Forward Contracts Determining Forward Rates FX Futures Contracts Currency Swaps The Basics of FX Options Options from an FXRM Point of View Key Chapter Takeaways Further Reading 6 Hedge Accounting Explained Background Cash Flow vs Fair Value Hedging Cash Flow Hedging: Basic Principles Hedge Accounting: An Example Fair Value Hedge: An Example Net Investment Hedge: An Example Requirements for Hedge Accounting Some Perspectives on Hedge Accounting Key Chapter Takeaways Further Reading 7 Centralizing Exposure Management Centralized FX Hedging Defined Benefits of Centralization Internal Hedging Arrangements Dealing with FX Exposures in Business Units The Centralization Process Key Chapter Takeaways Further Reading 8 Integrated Risk Management Silo-Based Risk Management The Core Principles of IRM Netting Exposures Correlation Analysis Total Corporate Performance IRM Programmes: Beyond the Core Principles Key Chapter Takeaways Further Reading 9 Managing FX Risk Exposures Getting the Basics Right A Hierarchy of FX Risk Management Strategies Balancing Economics and Financial Management Due Diligence of FXRM Policy Proposals FXRM as Part of a Framework for IRM Key Chapter Takeaways Further Reading 10 Communicating FXRM Perspectives on Corporate Disclosure FXRM Communication: Too Little or Too Much Exposures vs Sensitivities Constructing Sensitivities Generating High-Quality Sensitivities Sensitivities: Putting It All Together Internal Communication of FXRM Key Chapter Takeaways Further Reading Index