Forward and Futures Hedging, Spread, and Target Strategies

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

3 We can make a hedge portfolio by taking a long position in the inflation indexed TIPS and a short position in the regular bond with the same duration. We know that there are two variables affecting the bonds---real interest rate and actual inflation rate. When nominal interest rate changes, long and short positions of bonds in portfolio offset each other. When inflation rate changes, TIPS would change its price and leave regular bond in short position exposed to inflation risk.

The derivatives program was reducing risk when the firm was investing in foreign currency futures for the first four months from the implementation date (February 1991 to May 1991). This is seen by the negative correlation of (0.94226594) between the derivative (futures) cash flow and the unhedged cash flow. A purpose of a perfect hedge is to obtain a net of zero or in other words, reduce your risk to nothing not including the cost of the hedge. If a correlation is negative, as it was for the first three

The current 50% hedging policy executed at the fund level has served well for OTPP for the past ten years, contributing to the fund’s positive returns. The FX Hedge Program not only has minimized the downside risk, but has also limited the upside potential. If OTPP decided not to implement a hedging program in 1996, they would have lost about $983 million CAD over the ten year period (1995-2005) which is valued at 2% of the portfolio. With the hedging program, OTPP was able to reduce the overall loss to about $469 million CAD, but also limited the gain from the depreciation of the pound.(Exhibit 1) Hedging is an excellent short-term risk minimizing strategy for long term investors, sustaining a continual payout of pensions during volatile times in OTPP’s invested currency markets. Currently, approximately 21% of OTPP’s net assets are exposed to foreign currency risk. Consequently, it is essential that OTPP maintain a risk management program of hedging, as slight currency fluctuations can significantly affect the value of the fund. Similarly to continual renewal of swaps, hedging can be a very expensive risk management strategy.

On the other hand, the peso devaluation will not have that much of a positive effect on Farmington (Antilles) N.V. as the peso depreciates relative to the USD. The result is the subsidiary being negatively impacted as the USD/peso exchange rate is rising, as they convert revenue earned in pesos to USD to deposit into U.S. bank accounts. This facility had almost 4 million MXN receivables at the end of the year. The 1994 average exchange rate is 3.5 MXN/USD, where these 4 million MXNs would equate to approximately 1.14 million USD. When the exchange rate values the devalued peso at 5.0 MXN/USD, these 4 million MXNs are only equal to 0.80 million USDs, showing a loss of more than 300,000 USDs. When the exchange rate changes from 4.0 to 5.0 MXN/USD, we can see the loss the company would experience, and thus the negative impact on this facility.

Since, the number is negative it shows that this is a "cost". If the result is positive, you are "benefiting" from the hedge relative to the value of the contract at current spot exchange rate.

Had Dozier’s management considered hedging their currency exposure on December 3, 1985, the day the bid was submitted, they would have been able to enter into the following contracts:

* Refer sheet “100% Options” of the attached excel. It shows the Cost that would be incurred with 100% hedge using Options for different scenarios.

The key objectives of GM’s foreign exchange risk management policy was to reduce cash flow and earnings volatility, minimize management time and costs dedicated to

If the company chooses not to hedge the costs, and the dollar weakens against the euro reaching a rate of USD 1,48/EUR, then it will encounter losses of $6,500,000 (Exhibit 1). On the other hand, if the dollar strengthens to the level of USD 1,01/EUR, then the company will register a gain of $5,250,000. (Exhibit 3)

Per contra, the Belgian Francs is in SHORT position: the company will loose money if Belgian Francs appreciate.

Those expenses act as a natural hedge that decreases the total exposure of Aspen to foreign exchange risk. For its revenues and expenses, after “natural hedging”, the overall exposure of Aspen to foreign exchange risk is $9,484,000, with Belgium

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.

In the past the market risk was hedged by shorting or short-selling representative shares of the market index In the past the market riskunder was The alternative hedged by shorting hedging the consideration was or shortselling representativehelp of put market risk with the shares of the market the market index options on index

From its definition it can be noticed that hedging is a strategy employed by companies in an effort to safeguard their economic position and to prevent the company from the losses which are associated with the unforeseen risks. Companies can hedge against risks which are associated with losses by taking control of their future purchases. The commodity prices vary in different markets and are caused or influenced by different economic factors. Some commodities are very scarce and with the increased depletion subject to the global demand in different foreign markets, the prices are set to be hiked in response to the established demand which positions the companies that use those particular commodities to have cash flow problems.