Essay On Hedge

The Balance of Payments in India mainly relies on services exports, remittances and the course capital flows, both foreign direct investments (FDI) and FII. It is very essential that all market participants, such as banks and other intermediaries be provided with the wherewithal so that they can undertake a risk management in a way that is scientific. One of the ways to access domestic, foreign exchange markets is to hedge on the underlying foreign exchange exposures. In addition, the facilities that are available as the booking of forward contracts were included in the domestic forex market in order to evolve and acquire volumes and depth (Sumanth, 2012). Some of the newer hedging instruments have put in place swaps and options in the

2) Minimize the cost associated with the foreign exchange risk management strategy, i.e. the management and hedging costs

Hedging is a significant measure of financial risk management. Since the 1970s, the increasing number of powerful companies started to control the risk of the exchange rate, the interest rate and commodity by using financial derivatives. ISDA (2013) based on the Global 500 Annual Report 2012 survey found that 88 percent of companies use foreign exchange derivatives. Modigliani & Miller (1958) believed that if the financial markets were under perfect conditions, for instance, there was no agency costs, asymmetric information, taxes and transaction costs, hedging would not increase the company 's value because investors can hedge by themselves. However, a large number of practical studies have shown that hedging is beneficial

3. In light of the various other techniques for hedging currency exposures why the market for currency swap does exists? Who benefits and who looses in such an agreement? Can a swap really create value for a corporation? And if so where does the value come from? What risks does the swap carry for the various parties involved?

A currency exposure is any business operation whose profitability can be impacted by a currency exchange rate fluctuation.

The presentation was scheduled for the first week of December 1990. Mr. Pross outlined the use of various derivatives, noting that they differed widely in their ability to reduce risk. If the company was, say, placing a large bid to buy a building abroad, one might prefer to use foreign currency options to hedge the currency risk in the event the deal fell through. He argued, however, that foreign currency futures were best suited to hedge the fluctuations in revenues arising from currency movements. Mr. Pross proposed a plan to hedge currency risk using futures which

For interest rate hedging strategy, swaps are used to hedge. And most importantly, interest rate swaps are an agreement between two counterparties exchanging one stream of future interest payments for another. Interest rate swaps can exchange a fixed payment for a floating payment or vice versa. We can also hedge against commodity price risk where this involves purchase of a futures contract, that guarantee a particular price at a certain point in time. In this case, the price is guaranteed and no unexpected loss can occur. Also no gain based on favorable price changes can occur as well. We can also hedge against commodity price risk where this involves purchase of a futures contract, that guarantee a particular price at a certain point in time. In this case, the price is guaranteed and no unexpected loss can occur. Also no gain based on favorable price changes can occur as well. Hedging against investment risk means strategically using instruments in the market to

Since the acceptance of Dozier Industries’ bid, the company CFO has been exploring the methods available to best manage the exchange risk associated with the award payment being dispersed in British Pounds (GBP). He originally considered a forward contract or a spot contract, but is now investigating how currency options could help hedge against uncertain foreign exchange exposure. The CFO needs to decide whether or not options contracts might provide some benefit to hedge the currency risk.

By paying an option premium, Jaguar could reserve the right but not bear the obligation to exercise the option –based on favorable or unfavorable currency levels.

But, even though the possibility of winning exists, the company is exposed to a greater risk if it does not hedge. Moreover, the policy of the company is to ensure against the risk, not to speculate on the foreign exchange market.

Hedging can be done in several ways, for instance engage in money market and a call/put option.

Most firms hedge at least some of their risks. Hedging can take two basic forms—namely, natural hedging and hedging by means of derivative instruments. The use of derivatives as hedges has expanded greatly in recent years.

Hedging can be defined as a risk management mechanism or strategy which is used to prevent the chances of incurring losses which arise as a result of fall in prices commodities or currencies. It is a technique which is majorly used by the investors in protecting their capital against the effects of the economic situations such as inflation whereby the investors invests in the high yield financial instruments or take a position to cushion them against such effects (Investopedia, 2012).

Another advantage to hedging is that it insulates companies from volatile price movements and ensures stable revenue income as price volatility can have an adverse effect onto revenue and disrupt cash flows. Furthermore, through hedging, a company can ensure certainty in both the production

Great Eastern Toys is a company in Hong Kong that exports a huge percent of its total sales to the North American and European markets and hence is exposed to currency risk. Previously, the company was occupied with expanding their business and the company 's management had never given much attention to currency risk until their recent meeting with their banker. The banker pointed out that the depreciation of the European currencies during the previous two years had resulted in a substantial loss of income. The company 's management was indeed convinced that they should begin to devote more time and manage their currency position. In this report, we are going to explore the different options for Great Eastern Toys to hedge