Summary of 5848 learning Module 4 on Hedging against Risk

1. What Have We Learned so Far? The Top Ten
Click here for a video commentary on your Top Ten Halftime Review!.
1.
We’ve learned there are consequences of doing nothing about it
2.
We’ve learned that there are different ways to deal with it
3.
We’ve learned that each way of dealing with it has it’s own strengths and weaknesses
4.
We’ve learned how to eliminate it with certainty using a Forward Contract
5.
We’ve learned how to limit downside risk and keep upside opportunity by buying a single
option…. if we’re willing to pay for the ‘insurance’
6.
We’ve learned how to use offsetting options to provide certainty as to our outcome, with
no or minimal net cost….but we’ve generally focused on forsaking the upside
7.
We’ve learned the concept of ‘liberalizing’ or manipulating our Option inputs to induce
various other outcomes, including managing premium costs as a trade-off against
accepting some downside risk, or retaining upside risk
8.
We’ve learned that, as companies get more complicated, they need to find ways to
streamline their process for handling foreign currency transaction risk
9.
We’ve learned that we just have to live with the fact that, however good or careful we are
in setting up our model for dealing with transaction risk, every once in a while doing
nothing would have led to a better outcome.
10. And….we’ve learned that there are multiple correct solutions to the transaction risk
problem facing companies that engage in multinational business
5848 Global Finance – R. Gross