Discount basis and Pre-transaction risk: Difference between pages

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imported>Doug Williamson
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This term can refer either to the cash flows of an instrument (Discount instruments) or to its basis of market quotation (Discount rate).
''Foreign exchange risk management''


1.


'''Example'''
Pre-transaction foreign exchange risk arises from needing to commit to a price before actually entering into transactions or commercial agreements.


An instrument is quoted - on a <u>discount basis</u>, one period before its maturity - at a discount of 10% per period.
For example, an exporter may need to publish a price list in the currency of its customers' local market.


This means that it is currently trading at a price of 100% LESS 10% = 90% of its terminal value.
Pre-transactional currency exposure also exists when an organisation tenders for a contract priced in a foreign currency, or where there are associated foreign currency costs, for example for materials, labour or other operational inputs.


(The periodic ''yield'' on this instrument is 10% / 90% = 11.11%.  So if the same instrument had been quoted on a <u>yield basis</u>, then the quoted yield per period = 11.11%.)
Some practitioners do not identify pre-transaction risk as a separate class of risk, rather considering it to be a shorter-term type of economic exposure.




The relationship between the periodic discount rate (d) and the periodic yield (r) is:
2.


r = d / ( 1 - d )
The same as Contingent risk as applied to currency management.


So in this case:


r = 0.10 / ( 1 - 0.10 = 0.90 )
Also known as pre-transactional risk, pre-transaction exposure or pre-transactional exposure.


= 11.11%


== See also ==
* [[Contingent risk]]
* [[Currency risk]]
* [[Economic exposure]]
* [[Transaction exposure]]


== See also ==
[[Category:Manage_risks]]
* [[Discount instruments]]
* [[Discount rate]]
* [[Sterling commercial paper]]
* [[US commercial paper]]
* [[Yield basis]]
* [[Effective annual rate]]
* [[Nominal annual rate]]
* [[Periodic discount rate]]
* [[Periodic yield]]

Revision as of 15:47, 17 March 2017

Foreign exchange risk management

1.

Pre-transaction foreign exchange risk arises from needing to commit to a price before actually entering into transactions or commercial agreements.

For example, an exporter may need to publish a price list in the currency of its customers' local market.

Pre-transactional currency exposure also exists when an organisation tenders for a contract priced in a foreign currency, or where there are associated foreign currency costs, for example for materials, labour or other operational inputs.

Some practitioners do not identify pre-transaction risk as a separate class of risk, rather considering it to be a shorter-term type of economic exposure.


2.

The same as Contingent risk as applied to currency management.


Also known as pre-transactional risk, pre-transaction exposure or pre-transactional exposure.


See also

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