Instruments Used for Hedging Exchange Rate Risks in the Forex Market, Based on the Practices of Hsbc Brazil
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Instruments used for hedging exchange rate risks in the forex market, based on the practices of HSBC Brazil
International Financial Management
Since Multinational Corporation’s performance is affected by exchange rate fluctuations the assessment of their vulnerability relating to unexpected developments in the foreign exchange market is one of the biggest challenges for risk management. Due to the prevailing volatility of financial markets, finding mechanisms to hedge companies against exchange rate risks when trying to achieve excess return becomes increasingly crucial. The basic idea of hedging strategies is to compensate potential losses that may be incurred by an investment by assuming a position in a contrary or…show more content… “This financial derivative represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date)” . The bank receives a soi-disant, option premium once its services for the covered deal have been enlisted.
A Stop Loss Forward (SWAP with limiter) is a hedge transaction whereby a company can negotiate today, a fixed price for a future purchase of a certain amount of US-Dollars. Doing so, the company can protect itself from Dollar appreciation against the Real (Debt becomes more expensive). Simultaneously, a maximum negative adjustment is determined in case of appreciation of the Real against the Dollar. Consequently, the company knows in advance the maximal cost of the hedging contract and has therefore less unexpected deviation from its original financial plan.
The “Export Lock” is a currency exchange instrument which pay offs fall on a future date. It is offered in two different forms: with a fixed interest rate and with allowance for exchange rate fluctuations. In case of a fixed rate contract, the exchange rate for the future export