ABSTRACT
Due to the nature of their business activity, multinational corporations are always exposed to exchange rate risk. This risk may affect the value of payables and receivables stated in terms of a foreign currency. This chapter explores ways in which the financial officer of a multinational corporation can manage transaction risk. It explains how the executive of an international entity can use spot and forward contracts to eliminate or reduce transaction exposure. To minimize the transaction risk associated with variations in the exchange rate, the multinationals may hedge their payables or receivables. To implement a spot hedge, the trader has to first estimate the present value of the Swiss franc payable by discounting the eight quarterly payments using a Swiss franc interest rate. To cover the payable with a forward hedge, the US importer has to find forward quotations meeting the maturity of each one of the eight payments.
