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Chapter 12 - Foreign exchange risk and exposure. In this chapter, the learning objectives are: To define risk and exposure; to elaborate on the concept of value at risk (VAR); to distinguish among transaction, economic and translation exposure; | Lecture International finance An analytical approach 3 e Chapter 12 - Imad A. Moosa Chapter 12 Foreign Exchange Risk and Exposure Objectives To define risk and exposure To elaborate on the concept of value at risk VAR To distinguish among transaction economic and translation exposure Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t a International Finance An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 12-2 Definitions of risk The chance of bad consequence loss etc. The Concise Oxford Dictionary The possibility of loss injury disadvantage or destruction Webster s Dictionary cont. Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t a International Finance An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 12-3 Definitions of risk cont. The origin of the word risk is either the Arabic risq or the Latin risicum cont. Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t a International Finance An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 12-4 Definitions of risk cont. In finance a distinction is made between risk and uncertainty In finance risk is measured by the dispersion around the mean value of the rate of return the cost of borrowing the value of assets and liabilities etc. Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t a International Finance An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 12-5 FX risk FX risk arises because of uncertainty about the future spot exchange rate It refers to the variability of the domestic currency value of certain items resulting from the variability of the exchange rate Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t a International Finance An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 12-6 Rate of return Vt 1 R V 1 Vt V SV R 1 S 1 V 1 Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t a International Finance An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 12-7 .
