There are as many different approaches to foreign exchange transaction exposure management as there are firms and no real consensus exists regarding the best approach
List and discuss three different exposures you can hedge and three different types of hedges (for example option hedges versus non-option hedges).
What will be an ideal response?
Answer: Foreign exchange exposure is a measure of the potential for a firm's profitability, net cash flow, and market value to change because of a change in exchange rates. There are two distinct categories of foreign exchange exposure for the firm: 1) Accounting exposure (transaction exposure and translation exposure) arises from contracts and accounts being denominated in foreign currency, 2) Economic exposure is the potential change in the value of the firm from its changing global competitiveness as determined by exchange rates.
A transaction exposure is created at the first moment the seller quotes a price in foreign currency terms to a potential buyer (quotation exposure). When the order is placed, the potential exposure created at the time of the quotation is converted into actual exposure, called backlog exposure, because the product has not yet been shipped or billed. Backlog exposure lasts until the goods are shipped and billed, at which time it becomes billing exposure. Billing exposure remains until payment is received by the seller.
Transaction exposure management programs are generally divided along an "option-line," those that use options (calls and puts) and those that do not (forward/futures contracts and money market hedges).
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