5.3. USING FORWARD CONTRACTS (2): HEDGING CONTRACTUAL EXPOSURE 181
An ongoing firm is likely to have many contracts outstanding, with varying ma-
turity dates and denominated in different foreign currencies. One can measure the
exposure for each given future day by summing the outstanding contractual foreign-
currency cash flows for a particular currency and date as illustrated in Example
5.6. Most items on the list are obvious except, perhaps, the long-term purchase and
sales agreements for goods and services, withfc-denominated prices for the items
bought or sold. By these we mean the contracts for goods or services that have not
yet given rise to delivery and invoicing of goods and, therefore, are not yet in the
accounting system. Don’t forget these! More in general, contracts do not necessarily
show up in the accounting system, notably when no goods have been delivered yet
or no money-market transaction has been made yet.
The net sum of all of the contractual inflows and outflows then gives us the firm’s
net exposure—an amount of net foreign currency inflows or outflows for a particular
date and currency, arising from contracts outstanding today.
Example 5.6
Suppose that ausfirm, Whyran Cabels, Inc., has the followingaudcommitments
(whereaudis the foreign currency):
1.A/R:aud100,000 next month andaud2,200,000 two months from now
- Expiring deposits:aud3,000,000 next month
3.A/P:aud2,300,000 next month, andaud1,000,000 two months from now - Loan due:aud2,300,000 two months from now
We can measure the exposure to theaudat the one- and two-month maturities as
shown in the table below:
item 30 days 60 days
Commercial contracts in roman, financial in italic in out in out
a.A/R: 100,000 — 2,200,000 —
b. Commodity sales contracts: 0 — 0 —
c.Expiring deposits: 3,000,000 — 0 —
d.Forward purchases: 0 — 0 —
e.inflows from forward loans inFC: 0 — 0 —
f.A/P: — 2,300,000 — 1,000,000
g. Commodity purchase contracts: — 0 — 0
h.Loan due: — 0 — 2,300,000
i.Forward sales: — 0 — 0
j.outflows for forward deposits inFC — 0 — 0
net flow +800,000 –1,100,000Thus, the net exposure to theaudone month from now isaud800,000 and two
months from now is –aud1,100,000.
Note that from a contractual-exposure point of view, the future exchange rate
would not matter if the net future cash flows were zero, that is, if future foreign
currency denominated inflows and outflows exactly canceled each other out. This,