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Hedging Foreign Exchange Exposure. Chapter 5 – Foreign Currency Derivatives
Use of Derivatives - Speculation: To make money - Hedging ...
... the German DM since 1980, Ruhnau had several financial hedging options to undertake
in order to minimize Lufthansa’s foreign exchange exposure risk for the ...
... a businesses’ exposure to negative change in exchange rates, interest ... Currency hedging
allows a ... the uncertainties attached to any foreign-currency transaction ...
... hedge prices can raise when the foreign exchange dealers become ... not affected by the
change in the exchange rate ... and determine what the risks of hedging could be ...
... in foreign currency to hedge its foreign currency receivables ... This will help eliminate
the exchange exposure. ... many of these types of hedging techniques before ...
Submitted by countsatyr on October 28, 2006
Category: Business
Words: 3955 | Pages: 16
Views: 511
Popularity Rank: 15,890
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Chapter 5 – Foreign Currency Derivatives
Use of Derivatives
- Speculation: To make money
- Hedging: To reduce the risk of future cash flows
Questions: 9, 10
Problems: 2, 5, 9
Futures Contract
Def: Is similar to a Forward contract in the sense that it is an agreement between two parties about a future delivery of an amount of foreign exchange at a fixed price, time, and place. The main difference is that futures are a standardized contract traded on an exchange while forwards are negotiated.
Short Position: Want to sell. (eg. p96) You are expecting the currency to fall in value. Therefore you chose to sell the currency in the future to make a speculative profit.
Short Position (value at maturity) = - contract amount x (spot rate at maturity– futures rate/settle price)
Long Position: Want to buy (eg p 96). You are expecting the currency to gain in value. Therefore you chose to buy the currency in the future to make a speculative profit.
Long Position (value at maturity) = contract amount x (spot rate at maturity – futures rate/settle price)
Example of a Future: Slide 5-4
Contract Specifications of Futures: Slide 5-6
Futures vs. Forwards: (full list on p98) Main points below
- Futures involve a margin account (a minimum amount of cash at the brokers. Can be waved for trusted clients)
- Gains and losses are settled immediately (mark to market). They are added/subtracted from the margin account
- If the margin account gets too low (a previously agreed amount), the client is asked to put more money in. Known as a Margin Call. This results in Futures having little risk for the bank.
Closing a Future contract: It can be closed by taking an opposite contract (short/long). The Margin account (whatever is left of it) is returned...
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