International Finance and Securities: Hedging Function and Risk Exposure Management

This report discusses the hedging function and risk exposure management in international finance and securities. It covers the meaning and types of foreign exchange markets, types of risk exposure, and ways to manage them. The report also includes a case study on Marks and Spencer.

International Finance
and Securities

Table of Contents
ABSTRACT....................................................................................................................................................3
INTRODUCTION...........................................................................................................................................4
Discussion on hedging function..............................................................................................................4
Meaning and types of foreign exchange market....................................................................................5
Types of risk exposure and the way to manage them............................................................................7
CONCLUSION.............................................................................................................................................10
References.................................................................................................................................................11

ABSTRACT
In general's terms, a hedging is utilized to mitigate a person's or a group's massive losses or
profits. Shares, marketplace vehicles, reinsurance, advance agreements, exchanges, choices, a
variety of over-the-counter and convertible instruments, and futures trading are all examples of
financial products that can be used to create a hedge. Currency fluctuations have a significant
impact on firms' performance and profitability these days, thanks to increased globalization and
increased currency devaluation. Monitoring and controlling exchange rate risk exposure is
critical for lowering a company's exposures to big exchange rate swings, which can have a
negative’s profitability, and exchange rate risk management is a key aspect from every
company's foreign exchange exposure considerations.

INTRODUCTION
International finance is a crucial source of economic management. It places an emphasis
relating to monetary relations between multiple countries. Worldwide accounting is concerned
with topics such as foreign exchange rates, global monetary frameworks, foreign investment
(FDI), and other critical aspects of global financial administration. The London Stock
Exchange's International Securities Market (ISM) is a market for international securities (a UK
Recognized Investment Exchange). The International Securities Market offers issuers a quick
and easy entrance procedure. Financial institutions interested in joining ISM just need to contact
the London Stock Exchange (Salami, and Sarea, 2021). The company chosen in the report is
Marks and Spencer. It is a UK based firm dealing in selling clothes, food and home products.
This report based on the Hedging which is an advanced strategy. In this report consist of
different types of exposures like economical, transaction and translation in context of
multinational organisation. Along with analysis various derivative tools used to hedge and
manage the risk raised by these exposures.
MAIN BODY
Discussion on hedging function
Forex Hedging refers to a transaction which is enforced in the forex market to safeguard
the current or anticipated value of the securities which are done in the forex market from the
fluctuations in the exchange rates. The hedging helps the participants like the investors, traders
and businesses to maintain the risk from these fluctuations in the market. Supporting with forex
is a procedure used to secure one's situation in a money pair from an unfavorable move. It is
normally a type of momentary insurance when a dealer is worried about information or an
occasion setting off instability in money markets. There are two related procedures when looking
at supporting forex sets thusly (Iwegbue, and et.al., 2021). One is to put a support by taking the
contrary situation in a similar money pair, and the subsequent methodology is to purchase forex
choices. A forex broker can make a "fence" to completely shield a current situation from an
unfortunate move in the money pair by holding both a short and a long position all the while on a
similar cash pair. This adaptation of a supporting system is alluded to as a "wonderful fence"
since it takes out the entirety of the danger (and along these lines the entirety of the expected
benefit) related with the exchange while the support is dynamic. In spite of the fact that selling a

cash pair that you hold long, may sound odd in light of the fact that the two restricting positions
offset one another, it is more normal than you may might suspect. Regularly this sort of
"support" emerges when a broker is standing firm on a long or short foothold as a drawn out
exchange and, instead of selling it, opens an opposite exchange to make the transient fence
before significant news or a significant occasion. The another option is a forex dealer can make a
"fence" to some degree shield a current situation from an unwanted move in the cash pair
utilizing forex choices (Fatas and et.al , 2021)). The system is alluded to as an "blemished fence"
on the grounds that the subsequent position for the most part disposes of just a portion of the
danger (and hence just a portion of the likely benefit) related with the exchange.
Meaning and types of foreign exchange market
The foreign exchange market can be defined as a market place at global level where the
currencies are being traded. It is a decentralized for of market which allows the people to sell
and purchase the currency in international market. This market is in the form of over the counter
market where the rates are decided by this market. . It includes purchasing, selling and
exchanging of currencies in the market. It is an institution where the currency of on country is
exchanged with other nation. It is made up of various markets as the trade is conducted among
individual nations takes place in this market. This market is the oldest mode an also the original
one and is regarded as a base for all the other financial structures where these materials are
traded. It helps in providing liquidity to the whole market of globe. An unfamiliar trade market is
a 24-hour over-the-counter (OTC) and sellers' market, implying that exchanges are finished
between two members by means of media communications innovation. The money markets are
likewise additionally partitioned into spot markets—which are for two-day repayments—and the
forward, trade, inter bank prospects, and choices markets. London, New York, and Tokyo rule
unfamiliar trade exchanging (Ye, and et.al., 2020). The cash markets are the biggest and
generally fluid of the relative multitude of monetary business sectors; the third figures from the
Bank for International Settlements (BIS) put day by day worldwide turnover in the unfamiliar
trade markets in trillions of dollars. It is calming to consider that in the mid 21st century a yearly
world exchange's unfamiliar trade is exchanged only not exactly like clockwork on the cash
markets, albeit the far reaching utilization of supporting and trades into and out of vehicle
monetary standards—as a more fluid mode of trade—implies that such proportions of monetary
action can be misrepresented.

Types of Foreign Exchange markets
Their are various types of foreign exchange markets in the world that are operating the
function of currency exchange. These are discussed below:
 Spot market - In the spot market, exchanges including cash sets occur. It happens
consistently and rapidly. The exchanges require moment instalment at the predominant
conversion standard which is otherwise called the spot rate. The merchants in the spot
market are not presented to the vulnerability of the market, which can prompt an
increment or decrease in the cost between the arrangement and exchange.
 Future Market - The exchanges in the prospects market require future instalment and
circulation at a formerly settled upon conversion standard which is known as the future
rate. The exchange or arrangement is more formal in nature which guarantees that the
details of the exchange are permanently established and can't be changed. Merchants who
lead most of the exchanges partake in a reliable profit from the resources. Customary
dealers lean toward a future market exchange (Lo, Abraham., Lipworth, and Aronoff,
2021).
 Forward Market - The third sort of unfamiliar trade market is the forward market where
arrangements are like future market exchanges. For this situation, the gatherings will
arrange the details of the exchanges and the terms settled upon can be arranged and
changed according to the necessities of the concerned gatherings. The forward market has
higher adaptability when contrasted with the fates market.
 Swap Market - When there is a synchronous getting and loaning of two kinds of
monetary standards between two financial backers, it is known as a trade exchange. Here,
one financial backer acquires a cash and thus, pays as a second money to the subsequent
financial backer. The exchange is done to take care of their commitments without
managing an unfamiliar trade hazard (Jebran, 2018).
 Option Market - In the choices market, the cash of trade from one category to the next is
settled upon by the financial bacTypes of risk exposure and the way to manage them.

 There are various types of risks related to the foreign exchange which are
discussed below along with their ways through which they can be managed.ker at a
particular rate and on a particular date. The financial backer has a privilege to change
over the cash on a future date however there is no commitment to do so. In the choices
market, the money of trade from one section to the next is settled upon by the financial
backer at a particular rate and on a particular date. The financial backer has an option to
change over the money on a future date however there is no commitment to do as such.
Types of risk exposure and the way to manage them.
There are various types of risks related to the foreign exchange which are discussed below along
with their ways through which they can be managed.
Transactional risk: The risk that a corporation faces while performing financial transactions
between countries is known as transaction risk. The danger is that the currency price will
increase well before transaction takes place. The duration between transactions and settling is, in
essence, the origin of transaction risk. Futures agreements and choices can be used to reduce
transaction risk (Tse, 2018).
Both of the exporting of commodities from the UK to foreign affiliates and the acquisition of
goods and materials immediately acquired from overseas suppliers result in transactional foreign
exchange exposure. Corporate treasury hedging such risks primarily by forward foreign
exchange contracts, which guarantee up to 100% of the exposures out to 18 months. With
Official permission, hedge cover can be extended beyond 18 months in some cases. Foreign
exchange risk is largely a concern for the Company when comparing pound to the US dollar and
euro (Khosrosereshki, and Heydari, 2021).
Futures foreign exchange agreements tied to the Group's forecasted currency needs are
characterised as hedge accounting, with market valuation changes reported immediately in
income statement. To the degree that such hedges cover existing currency payment period or
debtors, the income statement records the related fair value fluctuations expressly granted in
income statement alongside the accompanying assets and liabilities.

Forward foreign exchange sale or purchase agreements with a weighted mean maturity period of
six months had a total market valuation of £1,062 million (£865 million) at the date of the
financial statements (£865 million previous year) (last year five months).
Losses and gains in capital on further foreign currency agreements as of April 2, 2011 will be
delivered to the net income over the next 14 months (last year 13 months) from of the accounting
period. To mitigate balance sheet conversion risks, the Group combines the characteristics of
foreign exchange borrowing and contracts. Hedging foreign total wealth as of the balance sheet
date included €201 million and HK$192 million in options, as well as €nil (previous year €231
million) and HK$nil (last year HK$180 million) in foreign borrowing. Marks and Spencer can
manage the risk of transaction exposure by giving the exports cost in the same currency that will
be used in the imports. Also can use the leading and lagging which involves the currency of
foreign cash flow (Ezzedeen, 2018).
Translation risk: The risk posed by a corporation with a domestic headquarters but operating
presence in a global country, and whose economic results is signified in its native currency, is
defined as translation risk or translation exposure. Whenever a corporation keeps a larger
percentage of its assets, liabilities, or equities in a foreign exchange, the risk of translating
increases. Such as if Marks and Spencer reports in UK currency but has a subsidiary in India
then the branch working in India will face a translation risk because the financial performance of
the Indian Rupee will be needed to converted into UK dollar for the purpose of reporting. This
will create impact on the values of the Indian subsidiary as their will be a loss of amount on
conversion of figures. Thus if the subsidiary firm is present in the country whose currency is
weaker than the home industry then the assets and the profits of the whole firm will be less when
consolidated financial statement is prepared. But overall this impact will not be much for the
Marks and Spencer as the company will do not have to make regular inter state transactions. It
will not impact its cash flows. The impact would be seen only on its consolidated financial
position of the organisation. But this risk matters a lot when the parent firm has to sell its
subsidiary as the subsidiary and has to collect the amount. At this time the company received the
amount which will be affected by this risk (Yang, and et.al.,2021). This risk also becomes
important to be considered when the holding business receives dividend from the subsidiary as
this will impact the value of money that would be received by the main branch. This risk needs

to be managed by Marks and Spencer by providing funds to the foreign subsidiaries with the help
of foreign loan. They can also reduce this risk by purchasing hedging by future contracts. Along
with this, the company can also make the request to their clients to make the payment of goods
and services in the form of currency in which the firm itself is operating. Another useful method
is the use of forward contract in which the amount of exchange rate is fixed in the contract for a
specified time period (Mamipour, and Jafari, 2017).
Economic risk: Economic risk, often referred as prediction risk, is the risk that an organization's
market value will be influenced by inevitable exchange rate movements. Market indicators, such
as global tensions and/or government inefficiency, are often the source of this form of risk.
Monetary exposure, otherwise called operating exposure, can generously affect an organization's
fairly estimated worth since it has comprehensive impacts and is long period in nature.
Organizations can hedge against shocking money uncertainties by putting resources into foreign
trade exchanging.
The level of economic exposure is directly proportional to currency volatility. Economic
engagement increases with increasing exchange rate volatility and decreases with decreasing
volatility. The economic risk is obviously greater for multinational companies that have
numerous subsidiaries abroad and a large number of foreign currency transactions. However,
increasing globalization has made economic vulnerability a major source of risk for all
businesses and consumers. An economic risk can arise for any company regardless of its size and
even if it is only active in domestic markets (Sabbagha, Martins, and Ledimo, 2018).
As Marks and Spencer can sell the product only in the domestic market of UK and if they do not
export their goods, it can negatively impact the exchange value of the country. As it would not
be proved efficient in the import which will make the other countries market and the currency
rate cheaper which will thereby decrease the value of the currency rate of UK also. It therefore
impacts the fluctuation on the exchange rate which can have an impact on the cash flows of
Marks and Spencer. These fluctuations in the exchange rate influences the inflation, interest rates
and many more. It helps in increasing the sales in the overseas market considering the existing or
new market of the company. Marks and Spencer should be very confident about the benefits
which can be get through the economic exposure by proceeding the operation restructuring work
due to the higher costs of reversal. The organization gave various subsidiaries in the numerous

countries which make them face a high risk of economic exposure. The risk of monetary
exposure can be supported either by functional techniques or money risk mitigation systems.
CONCLUSION
From the above report it can be concluded that the foreign exchange holds the power to
affect the whole economy of the world. Its function of controlling the currency value of various
economies affects the whole economical structure. Hedging is the mode that can be used by the
businesses for reducing the risk of this change in the value of currency. Their are various types of
risks that affects the companies who perform their functions across different countries. The
strengthening and weakening of the value of currencies affects the fir when they prepare their
consolidated accounts. The change in the government policies and the interest rates also puts its
impact on the value of currency. Thus, it becomes important for the organizations to hedge their
investment and maintain their value of profits. This also provides them a feeling of security and
thus encourages them to invest in foreign country.

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