Hedging Strategy Of Derivatives With Each Of Pros And Cons

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Hedging Strategy of Derivative with each of pros and cons
Corporates are more likely to hedge specific risk in order to minimise risks arisen from exchange rates and other market variables. So for hedging three types of risks mentioned above, it is better to use derivative securities. And the following will discuss a trading strategy using derivative contracts. And to hedge the currency risk, the currency future contracts will be applied for deriving certain risk. Finally, for equity price risk, option contracts will be used to offset the market risk. And their advantages and disadvantages will also be argued within each applied contract.
For currency risk:
Based on the nature of AMP’s subsidiary-AMP Capital has a wide range of international trading, it is highly likely that AMP will need to pay or receive different foreign currencies. If AMP is going to contribute additional investment to its Chinese JV company with Chinese dollar and predicts strong Chinese dollar in the future, it would like to lock in the price now by taking a long hedge position. As a result, like Graph 1 in below, when the exchange rate increases in the future, future contracts will work to avoid the loss in strong foreign currencies. But if it has a weak foreign currencies, AMP can still gain on exchange at spot rate to offset the loss on future contract. If AMP need to receive foreign currencies from other countries, it will need to take opposite position of future to hedge. At this time, the

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