currency risks

As a hedge against currency risks

As a hedge against currency risks

Forward - this is an urgent transaction where the buyer and seller agree on the delivery of the underlying asset (in our case - the euro against the dollar, or RUR) at a specified future date, while the base price set at the time of the transaction. Forwards - it's always over the counter product. In practice, it looks like this. The company makes a deal with the bank for the supply of euros for dollars, say, a month later. Immediately negotiated rate - say, $ 1.1 per euro. If the course of a month will be $ 1.2 per euro, the company will save 10 cents on every dollar. With $ 1 million in savings of $ 100 thousand If the rate drops to parity (11), the loss of the company will make the same $ 100 thousand and to avoid these losses (in the case of depreciation) can not forward - a commitment (so-called problem can be solved structured forward and options - but that's the next article). In addition, the striker has two unpleasant properties. First, it is necessary to pass the credit committee in a bank that sells the striker (the bank is required to assess the credit risk of the buyer). Second, the forwards have a negative impact on the liquidity of the company. For example, the situation has changed, and delivery of the euro was not needed (eg, payment in Euro provider, under which was bought forward, canceled or rescheduled to a later date). What to do then do nothing, the company is obliged to put dollars and get unwanted euros. In short, the striker was highly inconvenient to the product, even though forwards are mostly in the derivatives market.

Futures - is also a forward transaction. Futures differ from forwards in that it is the product of exchange and, hence, the conditions (time, amount) are standardized. In addition, the buyer makes to the stock exchange clearing house margin, as well as unfavorable exchange rate movement (in this case is - the growth of the dollar against the euro) variation margin, which guarantees the fulfillment of obligations to the seller bought futures. If the dollar depreciates, then the variation margin is already making a seller.

Claims against the futures were the same as that of a striker - the possibility of unlimited losses (however, futures, unlike forwards traded on the exchange every day, and could theoretically be sold prior to the date of execution - that in reality it is unlikely since it requires the active speculation, placing stop-loss, etc.), and the need to divert funds to make margin and generally undeveloped market futures exchange in Russia. Futures are traded on the exchange of two sites - the MICEX and SPCE.

The liquidity of the market (in fact, trade - the number of daily transactions, as well as applications for pokupkuprodazhu futures) in these markets is in its infancy. Currency swaps - the kind of financial transactions in which the buyer (seller) of currency at the time of purchase (sale) is committed to a certain period of time to sell (buy) the same currency. Swap market in Russia, there is little, except for interbank swaps. Structured as derivatives, such as Zero-cost Collar, Convertible-Forward, etc., due to its complexity and exotic will be considered separately.

The yield was found
Currency call option the dollar / euro payments in rubles! That this product was offered the company a multinational bank. Type of option - deliverable, ie assumes the delivery of the euro against the dollar. Instead of dollars can be put rubles (at the current exchange rate). What is the convenience of such a scheme for the company first, the option - a right, not an obligation. That is, when the liquidity conditions of the option can be waived. Second, the bank offered to buy options on any amounts and terms. Third, the option can not be unlimited losses, as the responsibility of the buyer is only paying the initial premium (option price), which is about 1.5% of the amount for one month at the current rate (eg, at the money). Options for longer periods, two months and more, are more expensive. Paid a premium, according to a new tax code, can be attributed to the cost - in the event that it was hedging, not speculation, it is easy to prove that the granting of a contract with a supplier in euros, which was purchased under the option. Deliverable scheme with options can be easily modified in the scheme of Non-Deliverable options, where there is no movement of currencies, but only the arbitration. Call option buyer receives the difference between the strike price (negotiated rate) and spot (current rate) in the event that spot above the strike price. However, the Tax Code, Non-Deliverable option must be the product of stock, but this is easily bypassed, if you make a deal, which actually lies between the customer and the bank, the stock exchange. The only disadvantage of the option - this product is worth more than the forward or futures contract, which, however, is clearly the right is always more expensive commitments.

Thus, the solution was found, and the company in the new year on a regular basis hedge their foreign exchange exposure, which helps it to avoid foreign exchange losses. And the hedge is happening in Russia, not the foreign offshore, which is an advantage and competitive advantage.

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