Exposures

Topics: Foreign exchange market, Automotive industry, Exchange rate Pages: 50 (12145 words) Published: September 4, 2013
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HOW ARE EXCHANGE RATE EXPOSURES MANAGED BY MNCs?

BY

0808982

A project report submitted in part requirement for the

M.A in Business Economics

University of Glasgow

School of Business

February 8, 2012

WORD COUNT: 9, 903

TABLE OF CONTENTS

ABSTRACT............................................................................................................................5

1. INTRODUCTION......................................................................................................6

2. LITERATURE REVIEW..........................................................................................9

1. The Framework For FX Determination.............................................................9

2.1.1 Purchasing Power Parity (PPP)....................................................................9

2.1.2 Interest Rate Parity (1RP)..........................................................................11

2.1.3 International Fisher Effect (IFE)................................................................11

2. Types of Foreign Exchange (FX) Exposures....................................................12

2.2.1 Translation Exposure……………………………………………………12

2.2.2 Transaction Exposure…………………………………….……………..13

2.2.3 Economic Exposure……………………………………………...………13

3. Measurement of FX Exposure...........................................................................14

4. Management of FX Exposure.............................................................................15

2.4.1 Internal Hedging...........................................................................................16

A) Restructuring.............................................................................................16

B) Netting.......................................................................................................16

C) Balance Sheet Hedging..............................................................................17

2.4.2 External Hedging..........................................................................................17

A) Currency Options.......................................................................................17

B) Currency Swaps........................................................................................18

C) Forward Contracts.....................................................................................18

D) Future Contracts........................................................................................19

3. RESEARCH METHODOLOGY....................................................................................20

4. FX EXPOSURES AND CAR MANUFACTURING MNCs..........................................23

1. General Motors (GM): Company Profile...............................................................23

4.1.1 GM FX Exposure Hedging...........................................................................25

4.2 Ford Motors: Company Profile...............................................................................26

4.2.1 Ford Motors FX Exposure...
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