There are some risks involved with international transactions due to fluctuations of the foreign currency exchange rates. One way to mitigate those risks is through hedging. Discuss the hedging options: forward contracts and option contracts. What are the advantages and disadvantages of each alternative? What are the costs of each alternative? When is one alternative preferred over the other?
It is generally not possible to completely eliminate both translation exposure and transaction exposure. In some cases, the elimination of one exposure will also eliminate the other. In other cases, the elimination of one exposure actually creates the other. Discuss which exposure might be viewed as the most important to manage. What are the advantages and disadvantages of the common methods for controlling translation exposure?
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