Foreign Exchange Hedging
This is the most visible and glamourised part of the Exposure Management function. However, the foreign exchange traders are only as good as the benchmarks and strategies that have been put in place.
a) Hedging strategies will be designed to meet the Exposure Management objective, as represented by the Benchmarks
b) The Exposure Management unit would be accorded full operational freedom to carry out the hedging function on a day-to-day basis with senior management supervision
c) Hedges will be undertaken only after appropriate Stop-Loss (meaning of Stop-Loss - is nothing but a commitment to reverse a decision when the view is proven to be wrong) levels have been predetermined.
d) The company must use all hedging techniques available to it, as per need and requirement. In this regard, it will pass a Board Resolution authorizing the use of the following:
- Foreign Currency Forward Contracts - Cross Currency Forward Contracts - Forward-to-Forward Contracts - Currency Swaps - Interest Rate Swaps - Currency Options - Interest Rate Options
Businesses with sizable denominated exposures are extremely vulnerable to sudden drastic moves in the currency rates. They can to an extent affect the buying power and stability of a country.
For instance, a Euro payable can be hedged by selling a currency (say Sterling Pound) in order to buy Euros, instead of selling the Rupee. The choice of currency would, of course, depend on the trend and forecast for the currency(s) at that point of time.
It is easier and safer to generate profits from a Cross-Currency Forward Contract and profit thereon is equivalent to the amount you invest and how knowledgeable you are about the market.
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