Futures represent a contractual agreement to buy or sell a financial instrument or commodity at a fixed price on a fixed future date. Futures differ from forward contracts in that they are traded on an exchange while forwards are contracts between two parties. A crucial difference between an option [...]
July 6th, 2009 - 9:09 pm § in Currency Risk
INVESTORS AND CURRENCY RISK
The relationship between institutional investors and the idea of currency risk has been an uneasy one. For a start, there remain an overly large number of investors who are either unwilling or unable, due to the specific regulations of their fund, to consider currency risk as separate and independen[...]
July 5th, 2009 - 9:08 pm § in Exchange risk
THE CORPORATION AND PREDICTING EXCHANGE RATES
A key aspect of corporate pricing strategy is forecasting future exchange rates. Aside from using banks to help them do this, the internal models corporations use are typically one or more of the following kinds: Political event analysis Fundamental Technical For the reasons we have mentioned earlie[...]
July 3rd, 2009 - 9:07 pm § in Exchange risk
BUDGET RATES
The setting of budget rates is crucially important for a corporation as it can drive not only the corporation’s hedging but also its pricing strategy as well. Budget exchange rates can be set in several ways. The benchmark or budget rate for an investment in a foreign subsidiary should normally be[...]
July 2nd, 2009 - 9:07 pm § in Currency Risk
BENCHMARKS FOR CURRENCY RISK MANAGEMENT
Corporations can use a variety of hedging benchmarks to manage their hedging strategies more rigorously. Aside from the hedging level as the benchmark (e.g. 75%), corporations which want to limit fluctuation in net equity use the reporting period as the benchmark for forward hedging. Typically, US c[...]
July 1st, 2009 - 9:07 pm § in Currency Risk
HEDGING EMERGING MARKET CURRENCY RISK
Emerging market currencies have important characteristics which a corporation needs to take account of with specific regard to a currency hedging programme: Liquidity risk, Convertibility risk, Event risk, Jump risk. Discontinuous price action. Implied volatility is a very poor guide to future spot [...]