The document discusses currency risk management and hedging strategies. It provides an overview of currency risk, defines different types of risk, and reviews case studies showing how hedging transactions protects a company's profits from foreign exchange volatility. The summary emphasizes that properly hedging transactions removes the impact of currency fluctuations and provides predictable income compared to being unhedged.
Tricumen / Revenue and (lack of) volatility_17-June-14
Currency Hedging Presentation
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3. The FX risk mechanism As the exchange rate rises, the value of the contract rises. Conversely, as the exchange rate falls, the value of the contract falls. EUR/USD USD/CAD What is FX Risk? Impact on contract + - Exchange Rate ( foreign/home ) Exchange Rate at Time of Contract
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9. Impact on contract + - Exchange Rate (foreign/home) Effect of Exchange Rate on contract value with hedging A perfect hedge moves opposite to the contract value, offsetting any changes in contract value. Proper hedging does NOT involve prediction or trend analysis, and CRM does not do so. What is Hedging? Contract Value vs. Exchange Rate Hedge Value vs. Exchange Rate
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12. Through hedging, the contract is essentially unaffected by FX rates Exposure is $50,000 USD Hedge is 5 long EUR puts/USD calls @ 1.4020 5 short EUR calls/USD puts @ 1.4030 Max net loss -$185 + $250 fee = $435 (.8%), compared to $3,200 (6.4%) Value at Risk XYZ Case Study #1, cont’d
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14. Exposure is $50,000 USD Hedge is a short future at 1.0080 Max net loss -$375 + $250 fee = $625 (1.1%), compared to $3,625 (7.25%) Value at Risk XYZ Case Study #2, cont’d Through hedging, the contract is essentially unaffected by FX rates
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16. If you were a banker, would you lend to Company A or Company B? Company A: earnings of $US500k / month, unhedged (trailing 20 months, EUR/USD) Other Benefits of Hedging Company B: earnings of $US500k / month, hedged (trailing 20 months, EUR/USD)
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25. Contact: Paul Stafford Office 1.406.626.1546 Email: [email_address] Website: www.CurrencyRiskManagement.com Contact Information
26. Scott Burke President , First Security Bank Gerald McConnell CEO , Spectrum Products Robert Bell Partner , Reep, Bell, Laird PC Michael Harrington Assistant Dean , U of M Business School Advisory Board