Managing Currency Risk with Financial and Operational Hedging Techniques

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Introduction Overview of the hedging techniques In the financial market, almost all of companies need to face the currency risk. In order to manage the currency risk, companies will use different hedging techniques, such as financial and operational hedging techniques. For example, money market, futures contracts, options and forwards contracts are commonly used by firms, as well as operational hedging techniques. All of 4 types of financial hedging techniques are short-term hedge. Money market is a part of financial markets for assets involved in short-term borrowing,lending, buying and selling. Its features are high liquidity, lower risk, such as treasury bills. Futures contracts are future transaction for buying or selling, and made…show more content…
Telefnica, a Spanish telecommunication company, faced the exchange rate risk. Foreign currency risk primarily show up in connection with1. The international presence of Telefnica, and the investment and businesses in other countries, such as Latin America, use other currencies, not the euro. 2. Liabilities denominated in currencies are different with its own country, and this debt is not likely to be conducted. At the same time, the thing of depreciation in foreign currencies relative to euro, and the value of cash flow has a loss in such currencies. However, this loss is offset by the reduction in the euro value of liabilities denominated. The level of exchange rate hedging was changed by the type of investment. In 2011, Telefnicas net debt was equivalent to about 7,953m euro in Latin America(Telefnica 2011). However, its currencies in which this debt is denominated is merged in percentage to the cash flow of each currency. the above hedge of exchange rate risks whether effective or not relies on which currencies depreciate relative to euro. In order to avoid decrease of the Latin America currencies relative to the euro, Telefnica group use the dollar-denominated debt. For instance, in spain, this is linked to an investment when it is suggested to be an effective hedge or in its own country. Meanwhile, the remaining exchange rate exposure on the income statement will be limited by the Telefnica Group to manage the exchange rate
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