ANSWER 5

Meaning Of Transaction Exposure

Transaction exposure is a type of foreign exchange (currency)
exposure incurred due to the fluctuations in exchange rates before the
contract is settled. The foreign exchange rate changes in
cross-currency transactions can adversely affect the involved parties.
Once a cross-currency contract has been framed and a specific amount
of money and quantity of goods is fixed, exchange rate fluctuations
can change the value of the contract. However, a company that has
agreed to a contract but has not yet settled it faces the transaction
exposure risk. The greater the time between agreement and
settlement of contracts, the higher the risk involved with exchange
rate fluctuations.

Exposure management is critical for multinational corporations or

businesses involved with exporting or importing goods. Techniques for
exposure management minimize the risks associated with currency
fluctuations when converting currencies. Businesses should carefully
consider each available option when encountering a situation requiring
exposure management, as there is not one best technique for
minimizing exposure risk.

Futures Contracts
 A futures contract is useful to provide limited exposure to risk by
allowing the business to either purchase or sell a contract representing
the currency and amount needed at a specified exchange rate. For
example, if your company is purchasing products by using euros 60
days from today, there is no way of knowing if the euro will be
stronger against your home currency, which would make the products
more expensive than anticipated. The forward contract allows you to
purchase the euros at today’s price but 60 days from today. A
disadvantage is that if your home currency becomes stronger, you can
not take advantage of the exchange rate because you already have
agreed upon a specified rate.

Forward Hedge

A forward hedge is similar to the futures contract, yet you can

negotiate the rate directly with the bank or financial institution. A
futures contract is a standard contract that can be purchased or sold
on the exchange market, whereas a forward hedge is a customized
solution for your business in particular.

Options

An option gives you the right to exchange the currency at a specified

rate, but not the obligation to do so. Consider an option as a type of
insurance policy for a specified time period, where you pay for the
option to make the trade in case the need arises where it would prove
useful.
 ANSWER 6
In a world of national currencies, the forex (foreign exchange) market
provides the mechanism for making payments across borders, transferring
money (and thus purchasing power) from one currency to another and of
course determining exchange rates.

The forex market has seen profound changes since the early 1970s, not
only in its size but also in the way in which it operates, as a result of
structural shifts in the world economy and in the international financial
system. Some of the main changes which have occurred in the world's
financial environment include:

1. A fundamental change in the international monetary system from the

fixed exchange rates arising out of the Bretton Woods agreement to a
much more flexible system in which countries can float their exchange
rates or follow other exchange rate practices of their own choosing.

2. Major financial deregulation across the globe including the elimination

of government controls and restrictions in almost every country, which
has resulted in far greater freedom in national and international financial
transactions and hugely increased competition among financial
institutions.

3. A fundamental change in savings and investment, with funds managers

and investment institutions around the world diversifying their
investments across international borders and into multiple currencies.

4. Major changes in, and liberalization of, international trade as a result of

a series of trade agreements including the Tokyo and the Uruguay Rounds
of the General Agreement on Tariffs and Trade, the North American Free
 Trade Agreement, and US bilateral trade initiatives with the European
Union, China and Japan.

5. Technological advances which have made it possible to achieve the

real-time transmission of huge amounts of market information worldwide
and to analyze that information rapidly so that market opportunities can
be identified and exploited. In addition, financial transactions can now be
executed quickly and safely, with a level of efficiency which allows costs to
be kept at level well below those which were possible previously.

6. New thinking in terms of both the theory and practice of finance which
have resulted in the development of many new financial instruments and
derivative products. Advances in thinking have also served to change our
understanding of the international financial system and the techniques we
need to use to operate within it.

As markets have grown and developed since the 1970s in a climate of

much greater freedom and competition, the role of the markets
themselves has changed and we have developed the tools and techniques
to allow us to exploit these growing markets to the full. One major
beneficiary of these changes has been the forex trader who has an
investment vehicle available today which was undreamt of a few years ago
and which will continue to provide the small investor with an excellent
trading opportunity for many years to come.

ANSWER 4

Since its founding in 1944, the International Monetary Fund (IMF) has had
its share of successes and failures in meeting its primary mission to watch
over the monetary system, guarantee exchange rate stability, and eliminate
restrictions that prevent or slow trade.1 The IMF came about because many
countries were economically devastated by the Great Depression and
World War II.

Over the years, the IMF has helped countries move through many different
challenging economic situations. The organization is also continuing to
evolve and adapt to the ever-changing world economy. We'll look at the
role the IMF has played, as well as economic issues, the levels of influence
some countries have over this organization, and its successes and failures.

The IMF's Role in Global Economic Issues

For many countries, the IMF has been the organization to turn to during
difficult economic times. Over the years this organization has played a key
role in helping countries turn around through the use of economic aid.
However, this is only one of the many roles the IMF plays in global
economic issues.

How the IMF Is Funded

The IMF is funded by a quota system where each country pays based on
the size of its economy and its political importance in world trade and
finance.2 When a country joins the organization, it usually pays a quarter of
its quota in the form of U.S. dollars, euros, yen, or pound sterling. The other
three quarters can be paid in their own currency. Generally, these quotas
are reviewed every five years. The IMF can use the quotas from developed
nations to lend aid to economically developing nations.

The IMF is also funded through contribution trust funds where the
organization acts as the trustee. This comes from the contributions from
members as opposed to quotas and is used to provide low-income
countries with low-interest loans and debt relief.3

Surveillance
The IMF watches the economics and economic policies of its members. There are

two main components of surveillance: country surveillance and multilateral

surveillance. Through country surveillance, the IMF visits the country once a year to

assess its economic policies and where they are headed. It reports its findings in

the Public Information Notice.8

Multilateral surveillance is when the IMF surveys global and regional economic

trends. It reports these twice a year in the World Economic Outlook and Global

Financial Stability Report. These two reports point out problems and potential risks

to the world economy and financial markets. The Regional Economic Outlook

Report gives more details and analysis.

Technical Assistance

The IMF helps countries to administer their economic and financial affairs. This

service is provided to any member country that asks for assistance and is typically

provided to low- and middle-income countries. Through the use of technical

assistance, the IMF can perform useful surveillance and lending to help the country

avoid economic pitfalls and create sustainable economic growth. Technical

assistance helps countries strengthen their economic policy, tax policy, monetary

policy, exchange rate system, and financial system stability.

Levels of Influence
With 190 member countries, some members of the IMF may have more influence

over its policies and decisions than others. The United States and Europe are the

major influences within the IMF.

The United States

The United States has the largest percentage of voting rights in the IMF with a

17.4% share and contributes the largest quota of any single country.9 Over the

years there have been many complaints that the U.S. uses the IMF as a way to

support countries that are strategically important to them, rather than based on

economic need. Many members feel that they should have more of a stake in what

the organization does when it determines how and in what ways to help out the

different countries.

CONCLUSION

The IMF does serve a very useful role in the world economy. Through the use of

lending, surveillance, and technical assistance, it can play a vital role in helping

identify potential problems and being able to help countries to contribute to the

global economy.

However, the United States and Europe have historically dominated the governing

body, and the IMF has had successes and failures. While no organization is perfect,

the IMF has served the purposes that it was established to do and continues to

keep evolving its role in an ever-changing world.

 Answer 7

A hedge is an investment that protects your finances from a

risky situation. Hedging is done to minimize or offset the

chance that your assets will lose value. It also limits your

loss to a known amount if the asset does lose value. It's

similar to home insurance. You pay a fixed amount each

month. If a fire wipes out all the value of your home, your

loss is the only the known amount of the deductible.

Hedging Strategies

Most investors who hedge use derivatives. These are

financial contracts that derive their value from an underlying

real asset, such as a stock.2 An option is the most

commonly used derivative. It gives you the right to buy or

sell a stock at a specified price within a window of time.

Here's how it works to protect you from risk. Let's say you

bought stock. You thought the price would go up but wanted

to protect against the loss if the price plummets. You'd

hedge that risk with a put option. For a small fee, you'd buy

the right to sell the stock at the same price. If it falls, you'd

exercise your put and make back the money you'd just

invested, minus the fee.

Hedges and Hedge Funds

Hedge funds use a lot of derivatives to hedge investments.

These are usually privately-owned investment funds. The

government doesn't regulate them as much as mutual funds

whose owners are public corporations.5

Hedge funds pay their managers a percent of the returns

they earn. They receive nothing if their investments lose

money. That attracts many investors who are frustrated by

paying mutual fund fees regardless of its performance.

Types of Hedging Strategies

Hedging strategies are broadly classified as follows:

Forward Contract: It is a contract between two parties for

buying or selling assets on a specified date, at a particular

price. This covers contracts such as forwarding exchange

contracts for commodities and currencies.

Futures Contract: This is a standard contract between two

parties for buying or selling assets at an agreed price and

quantity on a specified date. This covers various contracts

such as a currency futures contract.

Money Markets: These are the markets where short-term

buying, selling, lending, and borrowing happen with

maturities of less than a year. This includes various

contracts such as covered calls on equities, money market

operations for interest, and currencies.

How do Investors Hedge

The AMCs generally employ the following hedging strategies

to mitigate losses:

Asset Allocations: This is done by diversifying an investor’s

portfolio with various classes of assets. For instance, you

can invest 40% in the equities market and the rest in stable

asset classes. This balances your investments.

Structure: This is done by investing a certain portion of the

portfolio in debt instruments and the rest in derivatives.

Investing in debt provides stability to the portfolio while

investing in derivatives protects you from various risks.

Through Options: This strategy includes options of calls and

puts of assets. This facilitates you to secure your portfolio

directly.
Conclusion

Hedging provides a means for traders and investors to

mitigate market risk and volatility. It minimises the risk of

loss. Market risk and volatility are an integral part of the

market, and the main motive of investors is to make profits.

However, you are not in a position to control or manipulate

markets in order to safeguard your investments. Hedging

might not prevent losses, but it can considerably reduce the

effect of negative impacts.