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International Finance

International Finance. Multiple Currency Transaction Exposure Bill Reese. Estimate Net CFs in Each Currency. Example: This American company has exposure in four foreign currencies over the next quarter. Weight the Dollar Cash Flows. Pound 15 15/16 = .9375

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International Finance

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  1. International Finance Multiple Currency Transaction Exposure Bill Reese

  2. Estimate Net CFs in Each Currency • Example: This American company has exposure in four foreign currencies over the next quarter.

  3. Weight the Dollar Cash Flows Pound 15 15/16 = .9375 Can. $ 8 8/16 = .5 S. Krona -15 -15/16 = -.9375 Peso 8 8/16 = .5 16 The weights must add up to 1.0

  4. Estimate Volatility (standard deviation) of XR Movements over the Quarter British Pound – 2.8% Canadian Dollar – 2.7% Swedish Krona – 3.2% Mexican Peso – 3.5%

  5. Estimate the Correlations Between these Currencies over the Next Quarter

  6. Build a Variance/Covariance Matrix

  7. Build a Wtd. Var/Cov Matrix

  8. Determine the Portfolio Standard Deviation Variance = sum of cells in wtd. var/cov matrix = .00076536 Standard Deviation = Square Root of Variance = 2.7665%

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