Leads are deliberate early payments of amounts due to be paid in foreign currency to overseassuppliers, or other foreign currency payments. Leads can avoid the risk that the sterling cost of these payments may rise if the amounts of the payments are quoted in foreign currency and the foreign currency increases in value. Under what circumstances can how an international company can use ‘leads and lags’ to protect itself againstforeign exchange risk?

Leads are deliberate early payments of amounts due to be paid in foreign currency to overseassuppliers, or other foreign currency payments. Leads can avoid the risk that the sterling cost of these payments may rise if the amounts of the payments are quoted in foreign currency and the foreign currency increases in value. Under what circumstances can how an international company can use ‘leads and lags’ to protect itself againstforeign exchange risk?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

ChapterA6: Appendix 6: Government Intervention During The Asian Crisis

Section: Chapter Questions

Problem 13DQ

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Leads are deliberate early payments of amounts due to be paid in foreign currency to overseas suppliers, or other foreign currency payments. Leads can avoid the risk that the sterling cost of these payments may rise if the amounts of the payments are quoted in foreign currency and the foreign currency increases in value Under what circumstances can how an international company can use ‘leads and lags’ to protect itself against foreign exchange risk.
Which of the following is not an argument for central bank intervention? Exchange rates are highly volatile. Exchange rate fluctuations have an adverse effect on the macroeconomy. The market knows better than economic policy makers what the appropriate level of the exchange rate is. Central bank intervention can smooth out fluctuations in exchange rates.
Explain how exchange rate fluctuations affect the return from a foreign market measured in dollar terms. Discuss the empirical evidence on the effect of exchange rate uncertainty on the risk of foreign investment. Would exchange rate changes always increase the risk of foreign investment? Discuss the condition under which exchange rate changes may actually reduce the risk of foreign investment.
When a firm enters a transaction that need to be settled in foreign currency, what are the risks that they are exposed to? What are the possible ways for a firm to avoid those risks and what will be the effect?
d. Discuss whether Galina Works should avoid exchange rate risk by invoicing foreign customers in dollars. e. Explain to Galina Works how, in respect of foreign sales, discounting and factoring can be used as hedging tools to manage foreign currency risk.
Investors and MNCs exporting or importing goods and services or making foreign investments throughout the global economy are faced with an exchange rate risk,which can have severe financial consequences on firms profitability,cash flows,and their market value,if not managed appropriately. MNC's use a number of external techniques of risk(exposure)management and resort to contractual relationships outside thier companies in order to reduce (or redistribute)the risk of foreign exchange losses.What are the determinants of hedging currency risk or foreign exchange exposures which pose risks to MNC's cashflows,competitiveness,marker value and financial reporting.
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under what circumstances can how an international company can use 'leads and lags' to protect itself against foreign exchange risk.
Explain how multinational companies can reduce the foreign currency risk by hedging.
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Transaction exposure gives rise to foreign exchange gains and losses that are ultimately realized in cash True False Hedging does not protect companies from exchange rate fluctuations True False Assets and liabilities translated at the historical exchange rate are not exposed to a translation adjustment True False Spot rate is the today's (current) price for purchasing or selling a foreign currency True False Foreign currency option a right to buy or sell foreign currency True False