Exposures, Financial Contracts, and Operational Techniques Essay

Exposures, Financial Contracts, and Operational Techniques - Essay Example As the research declares the transaction exposure can be hedged through three types of contracts: forward market hedging, money market hedging, and option market hedging. The forward market hedging supposes to enter into a derivative contract when the object of the transaction exposure is determined. The contract from the derivative market will be liquidated with the funds obtained from the spot market. According to the paper findings in a money market hedge, the company which is exposed to transaction exposure borrows or invests in one currency and exchanges the proceeds for another currency. The proceeds for the loan or saving account are related to business operations when the hedge is covered or they are purchased from the market at the end of the contract when the hedge is uncovered. Operating exposure can also be offset by considering changing financing policies: using natural hedges, using back-to-back (parallel) loans, and using currency swaps. The first method considers matching the currency cash-flows. The success of this practice depends of the predictability and low volatility of cash-flows. Back-to-back loans are agreements between companies from different countries to borrow each other domestic currency for the period of contract. It is actually a credit swap, because the two companies borrow the currency which will be repaid.