Problem: You have been hired as the treasurer of Oxford International, the automobile firm with many subsidiaries abroad. The management of Oxford International is relatively non-finance people and as one of your task, you are anticipated to advise management of the potential currency exposure the firm might face and on management of currency risk.
Question1. Describe management the differentiation between transaction and translation risk, using suitable numerical examples.
Question2. In the case of transaction risks critically describe how one can use forward-spot swap deals and forward-forward deals to handle the risk.
Question3. One of the directors has heard that transaction experience can equally be managed externally by the forward hedge or internally by the money market hedge. He is extremely confused about these. Describe to him how these two hedging strategies vary and make an evaluation of both methods for him.
Question4. The same director is looking for some description about hedging through the futures market and the concept of ‘marking to market’. You are needed to give an description.