Hedging currency risk
Everyone should know the trader ► Hedging currency risk
Hedging options this exchange operation, the purpose of which is to fix the price of the underlying asset at the same level, thereby eliminating the risk of a possible adverse change in its value in the future, and the transactions are made at the same time with the option and the underlying asset. In general, hedging options is subject to the following basic rules: if there is a need to insure the position of the price fall, it should be an option to buy put, or sell the option call; if insurance is designed to eliminate the risk of the growth of the asset value, the need to sell the put-option or buying a call-option.
Hedging selling options such as "Call"
Owner of American-type option "Call" has the right (but not the obligation) at any time to buy a futures contract at a fixed price (the strike price). Thus, the option holder may exercise it if the current futures price is greater than the strike price. For the seller of the option the situation is reversed - for the option premium received on the sale, he agrees to sell the buyer the option request a futures contract at the strike price.
Security deposit for sold options such as "Call", is calculated similarly guarantee deposit to sell a futures contract. That is, these two strategies are very similar; Unlike them it is that the seller of the option receives a premium limits its income on term positions; as a result, the sold option compensates for the reduced price of the goods to a value not greater than the premium received.
Hedging purchase option such as "Put"
Owner of American-type option "Put" has the right (but not the obligation) at any time sell a futures contract at a fixed price (the strike price). By purchasing this type of option, the seller of the goods fixes the minimum sale price, while retaining the possibility to take advantage of favorable prices for it increase. By reducing the futures price below the strike price, the owner takes it (or sell), compensating for the loss of the market of real goods; with an increase in prices, he waives his right to exercise the option and sell the goods at the highest possible price. However, unlike the futures contract, the purchase of an option pays a premium, which is lost in case of failure to perform.
Collateral purchased option does not require.
That is, the type of hedging the purchase option "Put" similar to traditional insurance: the policyholder receives compensation when adverse developments for him (when the insured event) and loses the insurance premium in the normal development of the situation.
Hedging sale of futures contracts
This strategy is to sell on the futures market futures contracts in the amount corresponding to the volume of hedged party real goods (full hedge) or less (partial hedge).
The transaction on the futures market is usually the time when:
the seller can with certainty predict the cost of goods sold batch
the futures market price level was formed, providing a reasonable profit.
For example, if gasoline producer wants to hedge the future price of its sales and the cost of oil processing can be estimated at the time of purchase, in the same time carried out the entrance to the hedge, ie open positions in the futures market.
Hedging with futures contract fixes the price for future delivery of goods; while in the case of reducing the market "spot" prices of lost profit will be offset by income on sold futures contracts (with a decrease in the futures price traded futures profitable). However, the flip side of the coin is the inability to take advantage of rising prices in the real market - more profits on the "spot" market, in this case, would be "eaten up" losses on sold futures.
Another disadvantage of this method of hedging is the need to constantly maintain a certain amount of collateral of open futures positions. In the fall of prices "spot" on the real product, the maintenance of the minimum amount of collateral is not a critical condition because In this case, the stock is replenished by the seller variation margin on sold futures contracts; However, with an increase in prices, "the spot" (and with it - and the futures price) variation margin on open futures positions away from the exchange account, and may need to make additional funds.
Other hedging instruments
Developed by a significant number of other ways to hedge based on the options (such as the sale of an option such as "Call" and the use of premium received for the purchase of an option such as "Put" with a lower strike price and option type "Call" with greater exercise price).
Selection of specific hedging instruments must be carried out only after a detailed analysis of business needs hedger, the economic situation and prospects of the industry and the economy as a whole.
The most simple in terms of the realization of a complete short-term hedging single consignment. In this case, the hedger open position in the futures market, the volume of which as closely as possible corresponds to the volume sold the party of real goods and the period of performance of the futures contract is selected close to the date of execution the real deal. Close positions on the futures market at the time of execution of transactions on the "spot" market.
However, not always the real business needs can be satisfied with such a simple circuit.
1. If you want to hedge long-term deals (over 1 year), it is usually not possible to choose the fixed-term contract with the corresponding period of performance and has sufficient liquidity. In this case, resorted to the practice, known as "roll" (rollover). It lies in the fact that the first open position on closer contract (for example, with a maturity of 6 months), as well as liquidity improved by more distant
delivery times, positions near month closed and open positions on the remote.
2. More complex is also the implementation of hedging in a continuous or near-continuous production cycle. In this case, the futures market is constantly there are open positions with different delivery times. Managing this ever-changing "cash-term" position can be challenging.
3. It is not always possible to choose a commodity, exactly corresponding to the object the real deal. In these cases it is necessary to conduct additional analysis in order to find out which exchange goods or perhaps a group of products best suited to hedge commodity positions in the real market.
4. In some cases, change the price changes, also, the potential sales. At the same time the above-mentioned hedging schemes are ineffective because there is a situation "nedohedzhirovaniya" (the amount of the hedge is less than the volume of the actual position) or "perehedzhirovaniya" (volume greater than the volume of real hedge position). In both situations, the risk increases. The solution is a dynamic hedging when there is an ongoing analysis of the appropriate size-term positions in the real market situation and, if necessary, a change of this size.
The basic principles of hedge
1. Effective hedging program does not aim to completely eliminate the risk; It is designed to transform the risk of unacceptable forms acceptable. The purpose of hedging is to achieve an optimal risk profile, ie, the ratio between the benefits of hedging and its cost.
2. In deciding whether a hedge is important to assess the magnitude of the potential losses that the company may incur in case of non-hedge. If potential losses are insignificant (eg, little impact on company income), the benefits of hedging may be less than the costs of its implementation; In this case, the company should refrain from hedging.
3. Like any other financial activities, the hedging program requires the development of an internal system of rules and procedures.
4. The effectiveness of the hedge can be evaluated only in the context of (meaningless to talk about hedging profitability or a loss on the hedging operations in isolation from the main activity on the spot market).
Hedging Strategy - a set of specific hedging instruments and methods of their application in order to reduce price risks.
All hedging strategy based on the parallel movement of the price "spot" and the futures price, the result of which is the ability to compensate for the futures market losses incurred on the market of real goods. However, as we have already noted, this similarity is not perfect. Variability basis entails a residual risk can not be rectified with the help of hedging.
There are two main types of hedge - a hedge of the buyer and seller of hedge.
Hedge buyer is used in cases where the entrepreneur plans to buy a lot of goods in the future and seeks to reduce the risk associated with a possible increase in its price. The basic ways to hedge the future purchase price of the goods is to buy on the futures market of a futures contract, the purchase of an option type "Call" or sale of the option type "Put".
Hedge Seller applies in the opposite situation, ie when the need to limit the risks associated with a possible decrease in the price of goods. The methods of such hedging are selling a futures contract, the purchase of an option such as "put" or sell the option of "call".
What gives hedging
Although the costs of hedging, and the numerous challenges that the company can meet the development and implementation of a hedging strategy, its role in ensuring sustainable development is very high:
· There is a significant reduction of the price risk associated with the raw material procurement and delivery of finished products; Hedging interest rate and exchange rate reduces the uncertainty of future cash flows and provides a more efficient financial management. As a result, vibrations are reduced profits and improved production control.
· Well built hedging program reduces the risk and costs. Hedging frees up company resources and helps management personnel to focus on the aspects of business,
which the company has a competitive advantage, while minimizing the risks that are not central. In the end, hedging increases capital by reducing the value of the use of funds and stabilizing revenues.
· Hedge does not interfere with normal business transactions and ensures permanent protection of prices without having to change the policy of stocks or conclude long-term forward contracts.
· In many cases hedge facilitates the attraction of credit resources: banks take into account the hedged deposits at a higher rate; the same applies to contracts for the supply of finished products.
I repeat - the hedge does not set as its immediate task increase profits; a source of profit is the main industrial activity.
Hedging currency risk
Currency hedging (hedging of currency risks) is the conclusion of forward transactions for the purchase or sale of foreign currency in order to avoid price fluctuations.
Hedging currency risk is to purchase (sale) of foreign exchange contracts for a period simultaneously with the sale (purchase) of the currency, the available, with the same delivery time and carrying out the reverse operation with the onset term of the actual delivery of currency. Under the currency hedging is generally understood - the protection of funds from adverse movements in exchange rates, which is to fix the current value of these funds by trading on the currency market (interbank forex market or foreign exchange market).
In recent years, many companies faced with foreign exchange transactions, realized the need to control foreign exchange risk, and have been paying close attention to them. currency flow management, though not the purpose of the main activities of the organization, often has a significant impact on the financial results of this activity.
Traditionally, there are two types of hedges:
1. The contract is strictly fixing the exchange rate in the given period (forward / futures).
2. The contract, which entitles to carry out foreign exchange transactions at a fixed rate for a set period (optional).
These are the two basic tools that offer in Russia a few dozen major banks, some management companies and brokers.
In the case of forward contract Russian importer can fix the euro at a certain level and a certain period. For example, a contract with a German supplier of spare parts importer can hedge using forward purchase contract.
For example, 13 January importer knows that will produce immediate conversion to 1 500 000 euros on 13 February. Let the rate of 13 January is 39.45 rubles per euro. Importer captures the euro in the bank for 1 month at the level of 39.50 rubles per euro. This means that regardless of the behavior of the euro will make the importer to convert 1 500 000 at the rate of 39.50 rubles per euro.
Assume that a month later the euro became 39.75 rubles per euro, and the Russian importer saved 0.25 rubles each euros, or 375,000 rubles contract with par value of 1 500 000 EUR. Accordingly, February 13, the importer again captures the euro for 1 month at the level of 39.80 rubles for one euro, buying a new forward contract. Assume that a month later the euro falls to 39.55, but the Russian importer still convert his contract at a pre-fixed rate to 39.80. by conversion losses are 0.25 rubles each euros, or 375 of 000 with a contract denominated in EUR 1 500 000.
In our example, on March 13 the importer is in the status quo with respect to the hedging forward contracts. Indeed, the use of a forward contract to protect the company from negative exchange rate changes. For the Russian importer striker is a good protection against the strengthening of the exchange rate, but a bad tool if the exchange rate falls. After all, in this situation the importing company is forced to change the currency at a rate that is worse than the market. If you are using a forward contract in a situation of falling currency importer loses the benefit that it could be obtained without the use of a forward contract.
If the importer wants to receive additional benefits when falling exchange rate, it is necessary to use the option - the right to buy or sell a currency at a pre-fixed rate at predetermined intervals.
Russian spare parts importer instead of striker may use hedging through options contracts. Using Options importer fixes the rate of the euro on January 13, say, at the level of 39.45 rubles per euro. For example, a month later the euro rose to 39.75 rubles per euro, the importer exercised the option and save 375,000 rubles staff 1 500 000 EUR. Next month, the company once again recorded the euro at the level of 39.80 rubles per euro.
Suppose, in March the euro weakens, and on March 13 the euro is equal to 39.55 rubles per euro. Then the importer fails to comply with an option by converting euros at the market rate. In this situation, the importer, at first glance, is always in the black. The only disadvantage of the option - the cost. For the right carry out the conversion in the future need to pay now. Option value may be an amount of 2% to 8% of the contract value. When hedging intervals of 1 month option value for the Russian importer (in the best scenario) would be 2% of the nominal value of the contract, or 30 000 euro (1,186,500 rubles at the rate of 39.55 rubles per euro).
In this example, the savings from the first conversion, which the importer receives from the option exercise is of 375 000 rubles. But for the option importer has already paid 1,186,500 rubles. It turns out that the savings from the use of the option is only partially blocked the cost. In the case of second conversion importer also spent 1,186,500 rubles, received just 375,000 of the relative benefits of the fall of the euro. Thus, we see that the use of stock options is not always a good solution because of the high cost of the options contracts.
What are the currency risks
Many believe that the foreign exchange risk arises when you bought the goods in a different currency. It is not so: Foreign currency risk arises only when this product begins to be sold in another.
One important note: if you are working without a delay of payment, the currency risk is minimized. It occurs only in companies working with deferred payment: you purchase goods, fixed the amount of hryvnia, which will receive from the sale of goods in a month. And then, this month you 'validolnaya "watch the course hryvnia, counting whether this amount will be enough to pay for purchase.
During this time, the course may change so that you lose time to pay 30-40 cents on the euro each - these figures were already in this year. In fact, we throw a dart with his eyes closed. Buying goods in euros, you are laying a course, for example, 10.20. But you do not know, he will be in two weeks so or not. Do you think that made a deal with the 15% profitability, and as a result "on the course" lost more.
Most resort to such a "natural hedging", laying in the price of the course "with reserve". But there is a more effective tool - forward contracts.
Proper currency risk insurance increases the probability of obtaining a revenue target, while reducing costs and risk.
Currency risk - possible losses related to changes in the mutual exchange rates. May occur in the exercise of commercial, credit, currency transactions by companies or private investors. In the most exposed to currency risks of export - import operations.
Hedging currency risk - insurance against possible changes in exchange rates Exporter may incur losses with a decrease rate of the contract currency against the national currency during the period between the date of signing the contract and make payments on it. Importer incurs losses in the case of appreciation of the currency of the contract.
Hedging currency risk - a topical issue for any company conducting foreign exchange transactions. Because of uncertainty about the future behavior of exchange rates the company may incur substantial losses due to adverse changes in exchange: it is the importer for the strengthening of the exchange rate, and for the exporter is weakening. Hedging currency risk through the use of financial instruments - it is one of the best ways to protect yourself from negative changes in exchange rates. But it is not so easy to give an accurate assessment of the value and the cost of hedging measures each situation.
Currency risk costs
Any risk involves uncertainty, and the problem is that the exchange rate fluctuations to predict with high accuracy is impossible. If the dollar suddenly becomes more expensive - importing company incurs additional costs, but it's not all her troubles. Uncertainty itself is a negative factor, which in one form or another materialize in the form of costs. In conditions of uncertainty there is a need to create a reserve for unexpected outcomes, and these funds are necessary to finance. The question is, how much will have to be frozen, and not an easy one, and the answer requires research. The likelihood that the decision "from the ceiling" will be effective, is negligible.
For clarity, let us consider another example. Russian company buys car parts importer in Germany for the euro, and sells them in Russia for rubles with a deferred payment for 6 months. Each month, the company enters into a contract for spare parts 1 purchase an average of 1 500 000 euros. At the time of conclusion of the contract the importer fixes the value of parts of the German manufacturer in the euro. But to pay for goods Russian company for 6 months. It is clear that to buy euro will be better at the lowest rate since when such conversion the company will spend fewer rubles. But when it is the lowest rate of the euro, it is impossible to say.
Well, if the euro falls, but if he grows up to, say, 40.12 rubles at the time of conclusion of the contract up to 41.00 rubles at the time of payment under the contract, the company-importer will pay no 60.18 million rubles and 61.5 million rubles, or 1.32 million more than planned.
1.32 million rubles - this is money that the importer in this case lost by the negative change of the euro. If this situation will be repeated on each contract, the total loss for the half-year period could reach a value of around 8 000 000. This is the amount of the company compensates its profits.
If the importer does not want Russia to deduct the money from his earnings, he can simply raise prices to customers by the amount of its losses from the appreciation of the euro. Also Russian importer can put a price to the client in the euro, and even then the client pays the difference, up to which the euro. In this case, the client will not be satisfied and may reconsider their choice in favor of other parts suppliers, which do not increase the prices of their products and did not shift their foreign exchange risk on the client. Thus, the exchange rate risk can affect not only the profits of the Russian importer, but also on its competitive advantage relative to other importers of spare parts.
In the case of the exporting companies, receiving dollar revenue, we have a similar, but mirror-opposite situation. When converting their foreign exchange earnings in the case of weakening of the currency the exporter will receive less rubles. And the stronger the currency falls, the less revenue in rubles receives exporter.
The main difference from other types of hedging transactions is that its purpose is not to extract extra profits, and reduce potential losses.
Because for risk reduction almost always have to pay, hedging is usually associated with additional costs (in the form of direct costs and profit shortfalls). Here are the few sources of these costs:
· Bargaining, hedger transfers part of the risk of the counterparty; such counterparty can be another hedger (also lowers your risk) or a speculator, which aims to close the position at a better price for ourselves in the future. Thus, the speculator assumes the additional risk, for which he receives compensation in the form of real money (for example, the sale of an option), or the possibility of their production in the future (in the case of a futures contract).
· The second reason for the cost of hedging is that any conclude transactions involve costs in the form of commissions and margin buying and selling prices.
· Another cost item in implementing hedging using futures exchange instruments - a security deposit charged by the exchange to ensure compliance with its obligations parties in the transaction. The magnitude of this deposit is typically from 2% to 20% of the hedged position is determined, primarily, the variability in the underlying
product. Warranty provision is required only for those derivative instruments, which have their owner, or there may be some obligations, ie, for futures and options sold.
· Finally, another source for the implementation of hedging costs - is a variation margin is calculated daily on futures, and in some cases - and options positions. Variation margin is removed from the account of the exchange hedger, if the futures price moves against their futures position (ie, in the direction of its real market position), and paid into the account, if the futures price moves in the opposite direction. It is in the form of the variation margin hedger compensate its possible loss on the market of real goods. However, be aware that the flow of funds for immediate part of the transaction is usually preceded by the movement of funds on the part of its cash.
· For example, in the case of hedging futures contracts, if the hedger loses money on real goods market and a profit on the futures market, the variation margin on open futures contracts it gets to the real market losses fixation (ie, the situation is favorable for him). However, in the opposite case (loss on futures contracts and gains on the market "spot") hedger pay Variation Margin is also to make a profit on the actual delivery of the goods, which can increase the cost of hedging.
The risk associated with the hedged position
The purpose of hedging is to reduce the price risk. However, to completely eliminate dependence on adverse market price movements real asset is usually not possible, moreover, not well defined hedging strategy may increase the company's exposure to price risk.
The main type of risk inherent in hedging - is the risk associated with non-parallel movement of the price of the real asset and the related derivative instruments (in other words - with the variability of the base). Basis risk is present due to several different operation of the law of supply and demand in the cash and derivatives markets. Prices of real and futures market can not differ too much, because while there are arbitrage opportunities, which, due to the high liquidity of the derivatives market, almost immediately nullified, however, some basis risk is always maintained.
Another source of risk is the basic administrative restrictions on the maximum daily fluctuations in the futures prices on certain markets. Because of these limitations may result in the fact that if the urgent need to close the position at the time of a strong movement of the real asset, the difference between the futures price and the price "spot" can be rather large.
New approaches to hedging currency risks
Every company wants to use an option, but that option thus worthless. Of course, this is the perfect option available for some types of businesses using the correct approach to reduce currency risks. But now we turn our attention to the hedging method that is available for the implementation of almost any company engaged in foreign exchange conversion.
Considered the currency hedging strategy may be applied to any company conducting currency exchange operations, wishing to protect themselves against currency risks while minimizing the cost of protection.
The strategy itself is a combination of derivative financial instruments, which allows maximum flexibility to manage the foreign currency position. The company always receives a favorable rate. As a result of the strategy importing company performs conversion at a fixed rate if the rate fixed above. And converts currency on the market if the exchange rate below the fixed. This strategy cost up to 1% per annum, which is 8 times cheaper option contract.
Consider the example of the application of the strategy of the importing company parts. By using the strategy importer fixes the rate of the euro at a certain level, for example, at the level of 39.45 rubles per euro for 2 months (not even matter what the level of fixation of the euro will occur). Suppose a month euro rate rose to the level of 39.75, and the Russian importer undertook to convert on a pre-fixed rate to 39.45 rubles per euro, received a 100% protection against the strengthening of the euro in the form of saving 375,000 rubles. A month later the euro fell to a level of 39.55, and the company has carried out the conversion of 99% (1.485 million euros) from the sum of the market contract, and 1% (15 000 euro) - for the previously fixed rate, having received 99% benefit from the fall of the euro . In other words, the importer receives the most flexible, the best solution of your monetary issues.
The word "hedge" is derived from the English "hedge", which literally means "fence" or "barrier". Only the stock market, it is not a physical barrier, and financial techniques that can protect investor capital from unfavorable market conditions…