hedging opportunities the new generation. a corporate that engages in any business activity in a...
TRANSCRIPT
Hedging Opportunities the new generation
• A corporate that engages in any business activity
in a currency other than its own local currency,
has a foreign exchange exposure.
Foreign Exchange Exposure
Possible FX Exposure Types
• Every corporation has a foreign exchange exposure. This includes – Importers– Exporters– Companies that have taken a foreign
loan– Multinational companies that need to
pay their employees salaries and taxes in different currencies.
Possible Hedging Tools
• Forward Deal• Buy Vanilla Option• Vanilla strategy (e.g. Risk Reversal)• Buy a Knock Out Option• Exotic Strategies
Comparing Forwards and Options
• Forwards:– Underlying exposure is offset by engaging in a
Forward deal– Obligation to exchange funds on maturity date – No future potential of additional gains from market
fluctuations
Comparing Forwards and Options
• Options– No obligation to exchange the underlying asset on
maturity date (for the buyer)– Vast possibilities of tailoring unique solutions
according to specific needs (OTC)– Opportunity to highly leverage one’s position
Illustration
• A European corporate is selling goods to a corporate in Great Britain.
• The corporate will receive 10 Million GBP in 9 months’ time
• Analysis:– Receivables in GBP, cost base in EUR– The European company needs to convert these GBP
into EUR – The European company will lose money if GBP/EUR
rate depreciates
Illustration
• Hedging possibilities:Forward Deal- Sell 10 Million GBP against EUR
settling in 9 months at a fixed rateBuy a Put GBP Call EUR Option Enter into a Vanilla Strategy (Typically a Risk
Reversal)Exotic Option Strategies
Illustration
• Sell 10 Million GBP against EUR at a strike of 1.49, on the 27 of June 2006
Forward
Buy Vanilla EUR Put
Buy Vanilla GBP Put (ATM)
• A European company will profit if GBP/EUR trades above the Forward Rate @ expiry
• Full protection from Strike price downwards
Risk Reversal
Risk Reversal
• A European company will profit if GBP/EUR trades above the Forward Rate and below 1.4880 (the SP of the sold Call GBP option @ expiry)
• Full protection from Strike price of the Put Euro option downwards
• No initial hedging costs
(“Zero Cost”)
Buy 1.4880 GBP Put with 1.4913 KO
Buy 1.4890 Euro Put with 1.49 KO
• A European company will profit if GBP/EUR trades above the Forward Rate @ expiry
• Full protection from Strike price downwards• Smaller hedging cost on inception date
Regulations & Accounting Standards
• Increasing regulations (FAS 133, IAS 39) require special attention by CFO’s and Treasurers to possible Fx exposure
Exotic options strategies for corporates – why?
• Enables a hedger to decrease hedging costs• A highly customizable hedging solution• Provides the opportunity to create mixed strategies
(Vanilla & Exotic – e.g. buy a vanilla, sell an exotic)
Exotic options hedging strategies
• Forward Extra• Window • European Knock In• Step Premium• Improver
Critical Hedging Tools
• Historical Data• Volatility Surface• Risk Management Tools • Reporting • Mark to market facility
Summary – Using SD-FX
• FX options can enable hedgers to profit from market fluctuations, customize tailor made solutions, while being completely hedged
• SD-FX allows you to price these options accurately and to abide by the accounting regulations
• For more details please contact:
Irene ZaslavskyTel: +44(0)20 7724 [email protected]