DOCSLIB.ORG

Currency Futures and Swaps

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Currency Futures and Swaps Currency Futures and Swaps International Finance ‐ 04 Outline 1. The Market for Currency Futures 2. Markets for Currency Swaps Forward Contract is not Perfect There are two key imperfections in forward contracts: 1. Default risk: a. the customer fails to deliver ‐ the bank withholds the payment , b. the customer fails to buy ‐ the bank sells at spot ⟹ in both cases the net opportunity loss is , Ways of reducing default risk: • the right to offset –bank withdraws at the client’s default without breaching contract • credit lines (when dealing with banks) & credit agreements • restricted applications & shorter lives w/ option to rollover Forward Contract is not Perfect • margin in the form of interest‐baring deposit or of securities – form of collateral • the initial margin is posted ⟶ if market value of forward contract < 0 bank ask for additional margin ⟶ if customer fails to provide it, the bank seizes the margin and closes out • periodic reconstructing ‐ market value is computed every day – the party w/ negative value buys back the contract and new contract is signed ‐ if the loser fails to settle the value, the bank seizes the initial margin and closes out the contract 2. Illiquidity ‐ the lack of the secondary market prevents to easily sell forward contracts before maturity Futures contracts: alternative to forward contracts • Futures are forward transactions with standard contract sizes and maturity dates • Futures are standardized and are usually traded on an exchange created for this purpose (Chicago Mercantile/International Money Market is the largest one) • The average contract length is roughly 3 months. Futures contracts: currencies, sizes • USD/GBP – 65,500 GBP at IMM • USD/EUR – 125,000 EUR at IMM • EUR/USD – 50,000 USD at Stockholm, EUREX • USD/CHF – 125,000 CHF at IMM • USD/AUD, USD/NZD – 100,000 AUD‐NZD at IMM‐NZFE • USD/JPY – 12,500,000 JPY at IMM • USD/CAD – 100,000 at IMM Features of Future Contract A currency future contract's characteristics: • the initial value is zero • it stipulates delivery of a known number of FC units on a known future date T • the HC payment for the FC is known amount , & paid later Definition: buying a contract (purchase transaction) customer will get FC and pay it with HC Terminology: going long in FC / going long forex Features of Future Contract 1. Marking to market: measuring and recording a fair market value of asset (whose value changes over time) • we have daily cash flows , , with final payment , = ST • if , , < 0 buyer pays the seller • if , , > 0 seller pays the buyer • the payments are done through a clearing house • futures are similar to periodic reconstructing as in case of forward contract • but in forward contract changes are discounted, in futures not • in case of default, the loss is a one‐day marked‐to‐market outflow: all previous losses have already been settled Features of Future Contract Example: Implication of marking to the market At investor A buys EUR 1m at , = USD/EUR 0.960 At , = USD/EUR 0.890 At , = USD/EUR 0.889 and the investor A defaults Futures at investor A pays 1m (0.960 0.890) = USD 70000 as amarked‐to‐market cash flow. Because of default at , A does not pay 1m (0.890 0.889) = USD 1000 Forward the loss for the seller is 1m ( ) = 1m (0.960 0.889) = USD 71000 Features of Future Contract 2. Margin requirements • a buyer and seller should put up initial security that almost for sure covers a one‐day loss • initial margin • maintenance margin ‐ the minimal level of the margin; if reached margin call ‐ request to " the margin • failure to make a margin payment your position is liquidated • if you bought, the contract will be sold • if you were short, the contract will be bought • the loss or gain is subtracted from your margin Margin requirements also decrease the loss in case of default Features of Future Contract 3. Organized markets • forward contracts initiated over‐the‐counter and held until maturity • futures are traded on organized exchanges w/ specific terms of contracts, w/ an active secondary market 4. Standardized contracts • a future is standardized in size and expiration date • a forward contract is unique in size and expiry date Features of Future Contract 5. Clearing corporation • futures are not initiated between agents A and B, • but either party has a contract w/ a futures clearing corporation or clearing house • sale from A to B: A sells to clearing house clearing house sells to B • while in forward contracts , A sell to B directly Hedging with Future Contract Problems: • contract size is fixed it is unlikely to match the position to be hedged • the expiration dates of futures rarely match those of currency inflows/outflows which should be hedged • the choice of underlying assets in futures is limited – the currency one wished to hedge may not have a future contract the need for imperfect hedge: • cross‐hedge ‐ the currencies do not match • delta‐hedge ‐ the maturities do not match • cross‐and‐delta hedge ‐ currencies and maturities mismatch Generic Problem for Hedging w/ Futures We want to minimize the variance of the hedged cash flow 1. There is 1 unit of FC e ("exposure") to be received at time and will be converted into HC w/ spot rate . 2. The futures contract is available for a "related" currency h ("hedge") w/ expiration at 3. The size of the futures contract is 1 unit of FC h Generic Problem for Hedging w/ Futures 4. Contracts are infinitely divisible ‐ the fixed‐contract‐ size problem is ignored So, we want to minimize the variance of , , Where –the number of contract sold, – change in the prices btw t & , , Generic Problem for Hedging w/ Futures So slope coefficient from , , , , Where , Perfect Match There is a perfect match if • future contract expires at (that is, = ) • e = h • : on the last day of trading , the future price equal the spot rate 1 ‐ sell forward one for one Currency‐Mismatch Hedge or Cross‐Hedge • Future contract expires at (that is, = ) • e h • : on the last day of trading the future , price equal the spot rate In reality to run ∆ ´∆ ´, where ∆ denotes change of variable over time Currency‐Mismatch Hedge or Cross‐Hedge Since distribution of ∆S is still not constant, you might run the regressions with percentages " ", where ∆/ and use (by definition and ∆ ) ∆ / and is the cross rate • You assume that not but is constant / • Practitioners often guess 1 ⟹ • This rule is biased, but has zero sampling error Delta‐Hedge • Future contract does not expire at (that is, ) • e = h Since futures and forwards are almost indistinguishable 1 , 1 , ⟹ , , 1, 1, !!! ‐ interest rates are not know ahead of time now Delta‐Hedge The rule of thumb that there is no uncertainty abut interest rates and you assume some level of ratio 1 / 1 ⟹ , ⟹ a is like the forward‐looking regression coefficient of on The rule of thumb ‐ set the hedge ratio = the forecast ratio 1 / 1 • you can use the current n days rates or • forecast implicit on forward interest rates Cross‐and‐Delta Hedge The rule of thumb / • set the hedge ratio = x / • hedge ratio equals the current cross rate times the forecast ratio Adjusting for the Size of the Spot Exposure and the Future Contract So far we assume • exposure was 1 unit of currency j • the size of futures contract is 1 unit of FC i • if the exposure is a larger number, , the number of contracts one needs to sell obviously goes up proportionaly • if the size of the futures contract is rather than unity, the number of futures contracts goes down ⟹ the number of contracts to be sold in order to hedge units of currency j using a futures with size units of currency iis given by Pros and Cons of Futures Contracts Relative to Forwards Pros: • because of institutional arrangement in futures markets, the default risk is low even relatively small players can trade in the future markets • because of standardizations futures markets have low transaction costs small contracts can be arranged • because of the liquidity of the secondary market, futures positions can be closed out earlier Pros and Cons of Futures Contracts Relative to Forwards Cons: • because of standardization the hedge is almost sure imperfect: cheap future imperfect hedge vs expensive hedge in the forward market • future contracts exist only for a few high‐turnover exchange rates for most exchange rates the hedger has to choose btw forward contracts or money‐market hedges, or across‐hedge in the futures markets, which is less effective Fixed‐for‐Fixed Currency Swaps A fixed‐for‐fixed currency swap is a transaction where two parties • two parties at the time of contract initiation, exchange the to principals • these two principals are denominated in different currencies, but have roughly the same market value • two parties return the principals when the contracts expires • in addition, they periodically pay a normal interest to each other on the amount borrowed • swap interest rate ‐ yield at par for near‐riskless bonds with the same maturities as the swap Why Are Swap Rates almost Riskless? • The risks in case of default are limited by the right‐to‐ offset clause • if one counterparty defaults the right‐to‐offset provides the other party the right not to full its obligation under the contract • The probability of default is low because the customers are screened Why Are Swap Rates almost Riskless? • Many swaps have a credit trigger clause • if the customer's credit trigger clause is downgraded the financial institution can terminate the
Load more

Recommended publications
  • Section 1256 and Foreign Currency Derivatives
    Section 1256 and Foreign Currency Derivatives Viva Hammer1 Mark-to-market taxation was considered “a fundamental departure from the concept of income realization in the U.S. tax law”2 when it was introduced in 1981. Congress was only game to propose the concept because of rampant “straddle” shelters that were undermining the U.S. tax system and commodities derivatives markets. Early in tax history, the Supreme Court articulated the realization principle as a Constitutional limitation on Congress’ taxing power. But in 1981, lawmakers makers felt confident imposing mark-to-market on exchange traded futures contracts because of the exchanges’ system of variation margin. However, when in 1982 non-exchange foreign currency traders asked to come within the ambit of mark-to-market taxation, Congress acceded to their demands even though this market had no equivalent to variation margin. This opportunistic rather than policy-driven history has spawned a great debate amongst tax practitioners as to the scope of the mark-to-market rule governing foreign currency contracts. Several recent cases have added fuel to the debate. The Straddle Shelters of the 1970s Straddle shelters were developed to exploit several structural flaws in the U.S. tax system: (1) the vast gulf between ordinary income tax rate (maximum 70%) and long term capital gain rate (28%), (2) the arbitrary distinction between capital gain and ordinary income, making it relatively easy to convert one to the other, and (3) the non- economic tax treatment of derivative contracts. Straddle shelters were so pervasive that in 1978 it was estimated that more than 75% of the open interest in silver futures were entered into to accommodate tax straddles and demand for U.S.
    [Show full text]
  • Pfsvx Statement of Additional
    LITMAN GREGORY FUNDS TRUST PartnerSelect SBH Focused Small Value Fund - Institutional Class – PFSVX STATEMENT OF ADDITIONAL INFORMATION Dated July 23, 2020 This Statement of Additional Information (“SAI”) is not a prospectus, and it should be read in conjunction with the prospectus dated July 23, 2020, as it may be amended from time to time, of PartnerSelect SBH Focused Small Value Fund (the “Focused Small Value Fund” or the “Fund”), a series of the Litman Gregory Funds Trust (the “Trust”), formerly known as the Masters’ Select Funds Trust until August 2011 and the Masters’ Select Investment Trust until December 1997. Litman Gregory Fund Advisors, LLC (the “Advisor” or “Litman Gregory”) is the investment advisor of the Fund. The Advisor has retained an investment manager as sub-advisor (the “Sub- Advisor”), which is responsible for portfolio management of the Fund’s assets. A copy of the Fund’s prospectus and the Trust’s most recent annual report may be obtained from the Trust without charge at 1676 N. California Blvd., Suite 500, Walnut Creek, California 94596, telephone 1-800-960-0188. The Trust’s audited financial statements for the fiscal year ended December 31, 2019 are incorporated by reference to the Trust’s Annual Report for the fiscal year ended December 31, 2019. The Fund is not included in the Trust’s most recent Annual Report because it commenced investment operations after December 31, 2019, but will be included in the Trust’s next report to shareholders following such date. 1 TABLE OF CONTENTS FUND HISTORY .......................................................................................................................................................... 3 INVESTMENT OBJECTIVES, POLICIES AND RISKS ...........................................................................................
    [Show full text]
  • Decreto Del Direttore Amministrativo N
    Corso di Laurea magistrale (ordinamento ex D.M. 270/2004) in Economia e Finanza Tesi di Laurea Gli strumenti derivati ed il loro utilizzo in azienda: l’importanza di gestirne i vantaggi e le complessità Relatore Prof. Guido Massimiliano Mantovani Laureando Ambra Moschini Matricola:835318 Anno Accademico 2013 / 2014 Sessione straordinaria 2 Indice Indice delle Figure ....................................................................................................................... 6 Indice delle Tavole ...................................................................................................................... 7 Introduzione ................................................................................................................................. 8 Capitolo 1 - Il concetto di rischio ............................................................................................. 11 1.1. Definizione .................................................................................................................. 12 1.2. La percezione del rischio in azienda ........................................................................... 16 1.3. Identificazione delle categorie di rischio .................................................................... 24 1.3.1. Rischi finanziari .................................................................................................. 26 1.3.1.1. Rischio di mercato ............................................................................................... 28 1.3.1.1.1. Rischio di
    [Show full text]
  • The Federal Government's Use of Interest Rate Swaps and Currency
    The Federal Government’s Use of Interest Rate Swaps and Currency Swaps John Kiff, Uri Ron, and Shafiq Ebrahim, Financial Markets Department • Interest rate swaps and currency swaps are swap agreement is a contract in which contracts in which counterparties agree to two counterparties arrange to exchange exchange cash flows according to a pre-arranged cash-flow streams over a period of time A according to a pre-arranged formula. Two formula. In its capacity as fiscal agent for the federal government, the Bank of Canada has of the most common swap agreements are interest rate carried out swap agreements since fiscal year swaps and currency swaps. In an interest rate swap, counterparties exchange a series of interest payments 1984/85. denominated in the same currency; in a currency • The government uses these swap agreements to swap, counterparties exchange a series of interest pay- obtain cost-effective financing, to fund its foreign ments denominated in different currencies. There is exchange reserves, and to permit flexibility in no exchange of principal in an interest rate swap, but a managing its liabilities. principal payment is exchanged at the beginning and • To minimize its exposure to counterparty credit upon maturity of a currency-swap agreement. risk, the government applies strict credit-rating The swaps market originated in the late 1970s, when criteria and conservative exposure limits based on simultaneous loans were arranged between British a methodology developed by the Bank for and U.S. entities to bypass regulatory barriers on the International Settlements. movement of foreign currency. The first-known foreign currency swap transaction was between the World • Between fiscal 1987/88 and 1994/95, the Bank and IBM in August 1981 and was arranged by government used domestic interest rate swaps to Salomon Brothers (Das 1994, 14–36).
    [Show full text]
  • European Tracker of Financing Measures
    20 May 2020 This publication provides a high level summary of the targeted measures taken in the United Kingdom and selected European jurisdictions, designed to support businesses and provide relief from the impact of COVID-19. This information has been put together with the assistance of Wolf Theiss for Austria, Stibbe for Benelux, Kromann Reumert for Denmark, Arthur Cox for Ireland, Gide Loyrette Nouel for France, Noerr for Germany, Gianni Origoni, Grippo, Capelli & Partners for Italy, BAHR for Norway, Cuatrecasas for Portugal and Spain, Roschier for Finland and Sweden, Bär & Karrer AG for Switzerland. We would hereby like to thank them very much for their assistance. Ropes & Gray is maintaining a Coronavirus resource centre at www.ropesgray.com/en/coronavirus which contains information in relation to multiple geographies and practices with our UK related resources here. JURISDICTION PAGE EU LEVEL ...................................................................................................................................................................................................................... 2 UNITED KINGDOM ....................................................................................................................................................................................................... 8 IRELAND ....................................................................................................................................................................................................................
    [Show full text]
  • DEPARTMENT of the TREASURY Determination of Foreign Exchange
    This document has been submitted to the Office of the Federal Register (OFR) for publication and is pending placement on public display at the OFR and publication in the Federal Register. The document may vary slightly from the published document if minor editorial changes have been made during the OFR review process. Upon publication in the Federal Register, the regulation can be found at http://www.gpoaccess.gov/fr/, www.regulations.gov, and at www.treasury.gov. The document published in the Federal Register is the official document. DEPARTMENT OF THE TREASURY Determination of Foreign Exchange Swaps and Foreign Exchange Forwards under the Commodity Exchange Act AGENCY: Department of the Treasury, Departmental Offices. ACTION: Notice of Proposed Determination. SUMMARY: The Commodity Exchange Act (―CEA‖), as amended by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (―Dodd-Frank Act‖), authorizes the Secretary of the Treasury (―Secretary‖) to issue a written determination exempting foreign exchange swaps, foreign exchange forwards, or both, from the definition of a ―swap‖ under the CEA. The Secretary proposes to issue a determination that would exempt both foreign exchange swaps and foreign exchange forwards from the definition of ―swap,‖ in accordance with the relevant provisions of the CEA and invites comment on the proposed determination, as well as the factors supporting such a determination. DATES: Written comments must be received on or before [INSERT DATE THAT IS 30 DAYS AFTER PUBLICATION IN THE FEDERAL REGISTER], to be assured of consideration. ADDRESSES: Submission of Comments by mail: You may submit comments to: Office of Financial Markets, Department of the Treasury, 1500 Pennsylvania Avenue N.W., Washington, DC, 20220.
    [Show full text]
  • Currency Swaps Basis Swaps Basis Swaps Involve Swapping One Floating Index Rate for Another
    Advanced forms of currency swaps Basis swaps Basis swaps involve swapping one floating index rate for another. Banks may need to use basis swaps to arrange a currency swap for the customers. Example A customer wants to arrange a swap in which he pays fixed dollars and receives fixed sterling. The bank might arrange 3 other separate swap transactions: • an interest rate swap, fixed rate against floating rate, in dollars • an interest rate swap, fixed sterling against floating sterling • a currency basis swap, floating dollars against floating sterling Hedging the Bank’s risk Exposures arise from mismatched principal amounts, currencies and maturities. Hedging methods • If the bank is paying (receiving) a fixed rate on a swap, it could buy (sell) government bonds as a hedge. • If the bank is paying (receiving) a variable, it can hedge by lending (borrowing) in the money markets. When the bank finds a counterparty to transact a matching swap in the opposite direction, it will liquidate its hedge. Multi-legged swaps In a multi-legged swap a bank avoids taking on any currency risk itself by arranging three or more swaps with different clients in order to match currencies and amounts. Example A company wishes to arrange a swap in which it receives floating rate interest on Australian dollars and pays fixed interest on sterling. • a fixed sterling versus floating Australian dollar swap with the company • a floating Australian dollar versus floating dollar swap with counterparty A • a fixed sterling versus dollar swap with counterparty B Amortizing swaps The principal amount is reduced progressively by a series of re- exchanging during the life of the swap to match the amortization schedule of the underlying transaction.
    [Show full text]
  • Currency Derivatives
    Customer copy 1 (3) INFORMATION SHEET, as stipulated in the Swedish Securities Market Act - November 2012 Currency derivatives Introduction • The price of the option is called the premium and is paid by the holder of the option (the buyer) to the issuer of the option (the Currency derivatives are complex financial instruments and this is a seller). collective term for instruments such as options, futures and swaps. • Currency options are typically European style. This means that the The derivative's value is based on the underlying asset; the price is option can only be utilised or settled for cash on the expiry date. influenced partly by the interest rate, remaining maturity and volatility “American options” can be exercised by the holder during the term to (describes how much the underlying asset is estimated to vary during the expiration. term to maturity). When the underlying currency’s value rises or falls, the relative value of The characteristic of a derivative is that it is linked to events or conditions an investment in a currency option can be influenced more than the at a specified time or period in the future. relative value of an investment in the underlying currency (leverage effect). Different derivative instruments have different risk levels and factors that affect the return. It is therefore important that you find out what applies to Currency forwards the particular derivative that you will be investing in. The purpose may be to hedge a future payment or receivable at a known How currency derivatives work foreign exchange rate, thus avoiding a currency risk Currency derivatives are used to hedge a future payment or receivable in A currency forward is an agreement between two parties, where both the a foreign currency or to change a currency exposure over time.
    [Show full text]
  • Derivations Derivations
    DERIVATIONS® DEMYSTIFYING RISK MANAGEMENT SOLUTIONS VOLUME NO. 20 REVISIONS TO ACCOUNTING THE CHALLENGE RULES REOPENS DOOR TO DERIVATIVES IN CROSS-BORDER The global nature of the capital markets allows many companies to capture lower costs of FINANCING funds and greater market liquidity by raising capital outside their country of domicile. However, the full benefits of cheaper funding can only be realized if there is an Recent revisions to the new U.S. deri- economically viable, and financial statement friendly, method to convert foreign currency vatives accounting rules make it possible cash flows back into the company's functional currency. for U.S. GAAP issuers to again use cross- Long-term cross-currency interest rate swaps are a proven technique for addressing this currency interest rate swaps in global problem. They allow financing to be raised in the most efficient market, carry over the funding strategies. The changes restore financing advantages (cost, covenants, and rate character) from the source to the target financial statement hedge treatment for a currency, and eliminate currency risk on a cash-flow-neutral basis. widely used tool that enables borrowers to New U.S. accounting rules for derivatives and hedging activity have changed the financial access low cost capital across the world. statement impact of cross-currency interest rate swaps. The rules require mark-to-market treatment for derivative contracts, unless certain stringent hedge accounting rules are met, in which case deferral accounting is allowed. As initially written, the new rules excluded almost all cross-currency swaps from meeting hedge accounting guidelines. However, recent revisions now permit appropriately constructed transactions to qualify for hedge accounting.
    [Show full text]
  • Foreign Currency Swaps
    RECORD OF SOCIETY OF ACTUARIES 1990 VOL. 16 NO. 2 FOREIGN CURRENCY SWAPS Moderator: RANDALL LEE BOUSHEK Panelists: JOSEPH C. LAU* MICHAEL B. MURDOCH** PATRICIA OWENS** * Recorder: RANDALL LEE BOUSHEK o With the globalization of the capital markets and more active entry of U.S. insurance companies into the international insurance market, this instrument may become more widely used. -- What is it? -- Past uses and results -- Future potential uses MR. RANDALL LEE BOUSHEK: This is the panel discussion on foreign currency swaps. My name is Randy Boushek and I will be the moderator for this session. I am what you might call a nontraditional actuary, involved in asset management at Lutheran Brotherhood, a $7 billion fraternal benefit society headquartered in Minneapolis. Within our operation I am responsible for directing investment in all derivative securities markets, including mortgage-backed securities, asset-backed securities, options, futures, swaps, index-linked notes and other esoteric securities. At Lutheran Brotherhood we, like many in the industry, have for some time been researching the currency swap and nondollar bond markets for investment opportunity. The reasons for this are twofold. First, on the asset side, nondollar denominated debt and equity securities now constitute the first and third largest securities markets in the world and cannot be ignored in the asset allocation decision. Second, on the liability side, the opening of international insurance markets and the potential for growth in nondollar insurance liabilities represents both a significant opportunity and a significant risk for the domestic insurance industry. As evidence of this potential, at present the U.S. consumer accounts for approximately 40% of the premiums collected in the world.
    [Show full text]
  • Foreign Exchange Training Manual
    CONFIDENTIAL TREATMENT REQUESTED BY BARCLAYS SOURCE: LEHMAN LIVE LEHMAN BROTHERS FOREIGN EXCHANGE TRAINING MANUAL Confidential Treatment Requested By Lehman Brothers Holdings, Inc. LBEX-LL 3356480 CONFIDENTIAL TREATMENT REQUESTED BY BARCLAYS SOURCE: LEHMAN LIVE TABLE OF CONTENTS CONTENTS ....................................................................................................................................... PAGE FOREIGN EXCHANGE SPOT: INTRODUCTION ...................................................................... 1 FXSPOT: AN INTRODUCTION TO FOREIGN EXCHANGE SPOT TRANSACTIONS ........... 2 INTRODUCTION ...................................................................................................................... 2 WJ-IAT IS AN OUTRIGHT? ..................................................................................................... 3 VALUE DATES ........................................................................................................................... 4 CREDIT AND SETTLEMENT RISKS .................................................................................. 6 EXCHANGE RATE QUOTATION TERMS ...................................................................... 7 RECIPROCAL QUOTATION TERMS (RATES) ............................................................. 10 EXCHANGE RATE MOVEMENTS ................................................................................... 11 SHORTCUT ...............................................................................................................................
    [Show full text]
  • Using Financial Derivatives to Hedge Against Currency Risk
    USING FINANCIAL DERIVATIVES TO HEDGE AGAINST CURRENCY RISK BRITISH LARGE AND MEDIUM-SIZE FIRMS MY NGUYEN Arcada University of Applied Sciences International Business 2012 DEGREE THESIS Arcada Degree Programme: International Business Identification number: 11680 Author: My Nguyen Title: Using financial derivatives to hedge against currency risk in British large and medium-sized firms Supervisor (Arcada): Andreas Stenius Commissioned by: Abstract: Nowadays, as a growing number of firms strive to conduct their business at international market place, currency risk has increasingly raised concern among financial mangers due to its substantial impact on companies’ financial results. Financial derivative instruments (Forward, Futures, Options, Swaps) are utilized as efficient hedging mechanisms against such an exchange rate exposure. The main objective of this study is to examine whether derivatives play a primary role in mitigating an adverse movement in currency in multinational firm. The research is carried out in British large and medium- sized companies. The empirical research was conducted on the basis of qualitative method. The findings reveal that the downward effect of currency risk is identified and evaluated in a majority of multinational companies. Although other hedging techniques such as netting, borrowings or natural hedge are at times employed, financial derivative instruments are crucial to hedge against currency risk in multinational companies. In general, forwards is designated as the most favorable type of derivates to minimize exchange rate fluctuation, followed by swaps. Furthermore, hedging strategy is implemented in accordance with individual firm’s policy. Keywords: Currency risk, financial derivatives, hedging, British companies , Sterling, Pound , Forward, Swap , Future, option Number of pages: Language: English Date of acceptance: Table of contents FOREWORD ...............................................................................................................
    [Show full text]