Copyright © 2007 Pearson Addison-Wesley. All rights reserved. Chapter 8 Foreign Currency Derivatives

Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 1-2 Foreign Currency Derivatives Financial management of the MNE in the 21 st century involves financial derivatives. These derivatives, so named because their values are derived from underlying assets, are a powerful tool used in business today. These instruments can be used for two very distinct management objectives: –Speculation – use of derivative instruments to take a position in the expectation of a profit –Hedging – use of derivative instruments to reduce the risks associated with the everyday management of corporate cash flow

Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 1-3 Foreign Currency Derivatives Derivatives are used by firms to achieve one of more of the following individual benefits: –Permit firms to achieve payoffs that they would not be able to achieve without derivatives, or could achieve only at greater cost –Hedge risks that otherwise would not be possible to hedge –Make underlying markets more efficient –Reduce volatility of stock returns –Minimize earnings volatility –Reduce tax liabilities –Motivate management (agency theory effect)