Hedging currency risk: how to protect the money

Hedging currency risk - is a set of measures and operations carried out with the tools of the derivatives market, which include options, futures, forwards, aimed at reducing the impact on the final results of the company risk.In case of insurance by banks exchange risks hedged asset advocates planned to purchase or available currency.

In a crisis risks for companies doing business in various sectors of the economy, increased at times.In the financial sector, particularly increases the likelihood of losses or shortfall in earnings.Thus, it is appropriate to carry out hedging currency risk.

itself, the concept of the risk of adverse events is offensive or their consequences that lead to collateral damage or direct losses.The greatest importance are currency, investment and credit risk.They not only lead to a serious deterioration in the financial environment of the company, but in the end can cause bankruptcy or capital loss.

pressure is primarily on currency risk is the probability of occurrence of adverse effects of changes in foreign currency exchange rate relations in the national or from changes in the volume of income earned abroad when converted.These risks are primarily associated with the diversification and internationalization of the activities of banks conducted operations in these facilities.

is important to note the change in exchange rates is influenced by numerous factors.Here, for example, include the psychological factor, which is manifested in non-residents' confidence in the currency and domestic companies, regular overflow from one country to another cash flows, and, finally, speculation.To avoid or reduce the loss in this situation, make foreign currency hedging.

significant impact on the change rate of the national currency has an effect central banks of countries whose currencies works with the investor.For exchange rates, this factor is the most important.

Strengthening these risks forcing financial institutions, primarily banks to the need to minimize the negative effects by insurance or by conducting foreign currency hedging.

When insuring the long-term currency risk using swaps, which are a combination of forward contract forward and spot cash.Essentially, an association opposing the conversion of foreign currency transactions in the same amount with different value dates.This hedging currency risk is particularly useful to banks as a result does not form the uncovered foreign currency positions, as the same volume of bank liabilities and foreign currency claims.The result is that the swaps allow participants to share the risks of the financial market, thus paying off the most adverse effects.

use of such transactions is necessary, when concluding long-term forward contracts have difficulty because of fears of the bank that the other party does not fulfill its contract terms before the expiry of the contract.

hedging currency risks: varieties of swaps

The first type is similar to the registration counter credit when banks lend denominated in various currencies, or loans with the same approximate maturity.

In a second embodiment of the two banks is an agreement for the sale or purchase of foreign currency at spot rates.The transaction is carried out in the future or within a predetermined timeframe.

should be noted that foreign currency hedging in the case of well-built circuit will not only protect your company, but also in the long term will provide additional profit.