1442 Words3 Pages

4.2 Portfolio theory
As stated earlier, managers are constantly faced with uncertainty, which is something many economic models do not account for. In microeconomics for instance, theory assumes that the competitive firm knows the price at which it will sell the product it produces. However, from the decision to produce, to the time of production and to the actual sale there might be a delay. Therefore the price of the product at the time of selling might differ substantially from what was expected (Markowitz. , 1991). According to Markowitz, this uncertainty cannot be dismissed, simply because if managers and investors could predict the future, they would place all their money on one investment – the one with the highest return. With this in mind, Markowitz developed portfolio theory, in which he proves the value of diversification as it reduces uncertainty.
4.3 Managing FX exposure
With the theoretical part on FX exposure serving as background, this part focuses at some more practical issues that arise in terms of assessing the exposure. In order to manage the risk, a
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Since the rates are going to fluctuate, it is easy to imagine that the party, to whom the contract means a worse result than what the spot rate on the day of settlement will offer, will have a strong incentive to renege. Futures contracts solves this by use of two mechanisms, the first being that parties are required to post collateral, also called a margin, which serves as a guarantee that the parties can meet their obligations. The second mechanism is the daily settlement. Instead of waiting until the date of delivery, gains and losses are settled and exchanged every day through a process called ‘marking to market’ (Berk and DeMarzo, 2013). This means that cash changes hands every day, provided that the price of the contract

- Explains that managers are constantly faced with uncertainty, which many economic models do not account for. markowitz developed portfolio theory to prove the value of diversification.
- Explains that the seminar focuses on economic exposure and identifies two strategies for minimizing risk, namely operational and financial hedging.

- Explains that managers are constantly faced with uncertainty, which many economic models do not account for. markowitz developed portfolio theory to prove the value of diversification.
- Explains that the seminar focuses on economic exposure and identifies two strategies for minimizing risk, namely operational and financial hedging.
- Explains the different financial tools, forwards, future, options, debt, and swaps that can all be used to mitigate or eliminate some of the risk associated with fx exposure.
- Explains that foreign exchange is the exchange of one currency for another and risk naturally arises when transacting parties use different currencies.
- Explains the theoretical part on fx exposure serving as background, while the practical part focuses at some practical issues that arise in terms of assessing the exposure.
- Explains that forward contracts prevent the firm from enjoying gains created by positive fluctuations, assuming that the company uses forwards to hedge the entire exposure. however, they require the involved parties to perform sometime in the future.
- Explains that futures contracts are similar to forward contracts but differ in a number of ways. they are standardized in terms of amount, delivery dates, liquidity, and daily settlement.
- Explains that forwards and futures enable hedgers to exchange currency in the future at a fixed rate. however, in exchange rate contingent cash flows, firms might desire more flexibility.

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