Currency Transaction Exposure
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Please assist with understanding what factors affect a firm's degree of transaction exposure in a particular currency?
For those factors, what are the desirable characteristics that would reduce transaction exposure.
Additionally, explain how a U.S. corporation could hedge net receivables in Malaysian ringgit with a forward contract.
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Solution Summary
The risk that currency rate will change after the transaction is discussed step-by-step in this solution. The response also has the sources used.
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1. Transaction exposure is the risk that is faced by parties involved in international trade that currency exchange rates will change after the parties have entered into an agreement. This risk is such that fluctuation in exchange rates can lead to large losses for the parties. The first factor that impacts the transaction exposure is the monetary value of the exposed position. The second factor is the extent of fluctuation that takes place in the foreign currency.
2. For the first factor that is the monetary ...
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