Managing Trasaction Exposure Of A MNC

3 Pages 629 Words

This is the managing transaction exposure report for a multinational corporation with currency cash flows in Mexico and Colombia. This report will include Mexico and Colombia’s economic and financial environment, the forecast of there future spot rate, assessment of the size and risk of my exposure, appropriate hedging techniques, and finally the selection and reasoning of the hedging techniques that best suite my currencies.
The economic environment in Mexico has been growing steadily since 1995, contributing to this is a flexible exchange rate policy, and monetary and fiscal discipline. These economic policy instruments are helping to create strong conditions for macroeconomic stability and growth. While Mexico’s financial environment has also seen an improvement in the past couple years steadily improving largely due to there foreign direct investing. In addition the flexible exchange rates have helped out in absorbing external shocks, which should help avoid the pile-up of unwanted external finance pressures and macroeconomic imbalances.(world bank)
Colombia’s economic environment on the other hand has felt a increasing negative impact due to the illegal drug industry, the presence of active “insurgent groups,” and the pressure of external shocks. This does not help the economies performance which has gotten worse over the past few years, leading to an increase in Colombia’s country risk. Colombia’s financial environment has suffered also from many of the problems effecting the economy, which in turn has made it hard for them to get external financing. They are trying to get out of there financial problems by lowering interest rates and having a more competitive exchange rate.

The forecast of the future spot rate for the Mexican Peso is $0.1062/Peso
PPP for Fundamental Forecasting
ef = (1+(.021/2))/(1+(.061/2)) -1
ef = -0.01940805
Est+1 = 0.1086(1-.01940805)
Est+1 = $.10652
IRP
P = (1+(.0214/2))/(1...