DOCSLIB.ORG

Exchange Rate Risk Protection: Creating a Model for a Selected Company

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Exchange Rate Risk Protection: Creating a Model for a Selected Company UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS MASTER’S THESIS EXCHANGE RATE RISK PROTECTION: CREATING A MODEL FOR A SELECTED COMPANY Ljubljana, February 2017 TIMO GRANDOVEC, 19522771 AUTHORSHIP STATEMENT The undersigned Timo Grandovec, a student at the University of Ljubljana, Faculty of Economics, (hereafter: FELU), author of this written final work of studies with the title Analysis Of Company X’s Currency Hedging Simulation, prepared under supervision of prof. dr. Aleš Berk Skok, DECLARE 1. this written final work of studies to be based on the results of my own research; 2. the printed form of this written final work of studies to be identical to its electronic form; 3. the text of this written final work of studies to be language-edited and technically in adherence with the FELU’s Technical Guidelines for Written Works, which means that I cited and / or quoted works and opinions of other authors in this written final work of studies in accordance with the FELU’s Technical Guidelines for Written Works; 4. to be aware of the fact that plagiarism (in written or graphical form) is a criminal offence and can be prosecuted in accordance with the Criminal Code of the Republic of Slovenia; 5. to be aware of the consequences a proven plagiarism charge based on the this written final work could have for my status at the FELU in accordance with the relevant FELU Rules; 6. to have obtained all the necessary permits to use the data and works of other authors which are (in written or graphical form) referred to in this written final work of studies and to have clearly marked them; 7. to have acted in accordance with ethical principles during the preparation of this written final work of studies and to have, where necessary, obtained permission of the Ethics Committee; 8. my consent to use the electronic form of this written final work of studies for the detection of content similarity with other written works, using similarity detection software that is connected with the FELU Study Information System; 9. to transfer to the University of Ljubljana free of charge, non-exclusively, geographically and time-wise unlimited the right of saving this written final work of studies in the electronic form, the right of its reproduction, as well as the right of making this written final work of studies available to the public on the World Wide Web via the Repository of the University of Ljubljana; 10. my consent to publication of my personal data that are included in this written final work of studies and in this declaration, when this written final work of studies is published. Ljubljana, February 2017 Author’s signature: _________________________ TABLE OF CONTENTS INTRODUCTION ............................................................................................................................ 1 1 COMPANY X’S SITUATION ................................................................................................ 3 1.1 Financial results and financial exposure to foreign currency ........................................................ 3 1.2 Simple forecast of future cash flows of foreign currency ............................................................. 5 1.3 Company X’s foreign currency exposure ...................................................................................... 6 1.3.1 United Kingdom ......................................................................................................... 7 1.3.2 Sweden ..................................................................................................................... 10 1.3.3 Switzerland ............................................................................................................... 14 1.3.4 Poland ....................................................................................................................... 17 1.3.5 Russia ....................................................................................................................... 21 1.4 Company X’s foreign currency exposure conclusion ................................................................. 24 2 EXCHANGE RATE RISK .................................................................................................... 25 2.1 Transaction risk ........................................................................................................................... 25 2.1.1 Mini case study – Abu Dhabi ................................................................................... 26 2.2 Translation risk ............................................................................................................................ 27 2.2.1 Mini case study – Russian subsidiary ....................................................................... 27 2.3 Economic risk .............................................................................................................................. 29 2.3.1 Mini case study – natural hedge ............................................................................... 29 2.4 Measurement of exchange rate risk ............................................................................................. 30 2.4.1 Mini case study – VAR Calculation ......................................................................... 32 3 FINANCIAL INSTRUMENTS ............................................................................................. 33 3.1 Forward and futures contracts ..................................................................................................... 34 3.1.1 (Normal) Contango vs. (normal) backwardation...................................................... 35 3.1.2 Optimal Hedge Ratio ................................................................................................ 37 3.1.3 Mini case study......................................................................................................... 38 3.2 Swaps .......................................................................................................................................... 38 4 RESEARCH ............................................................................................................................ 40 4.1 1st Part: Historical analysis ......................................................................................................... 41 4.1.1 Methodology ............................................................................................................ 41 4.1.2 Cost estimation ......................................................................................................... 41 4.1.3 Empirical development ............................................................................................ 41 4.1.4 Example 1 ................................................................................................................. 42 4.1.5 Results ...................................................................................................................... 43 4.1.6 Summary .................................................................................................................. 60 4.2 2nd Part: VAR5 Simulation .......................................................................................................... 61 i 4.2.1 Methodology ............................................................................................................ 61 4.2.2 Results ...................................................................................................................... 62 4.2.3 Analysis .................................................................................................................... 68 CONCLUSION ............................................................................................................................... 70 REFERENCE LIST ....................................................................................................................... 72 LIST OF FIGURES Figure 1. Sales and exchange rate dynamics – Poland .......................................................... 3 Figure 2. Sales and exchange rate dynamics – Russia .......................................................... 4 Figure 3. Sales and exchange rate dynamics – Sweden ........................................................ 4 Figure 4. Sales and exchange rate dynamics – United Kingdom .......................................... 5 Figure 5. Total sales forecast on markets with foreign currency .......................................... 6 Figure 6. Frequency of invoices issued on UK Market ......................................................... 7 Figure 7. Yearly distribution of issued invoices on UK Market ........................................... 8 Figure 8. Frequency distribution of the difference between order and invoice issue (in days) ...................................................................................................................................... 8 Figure 9. EURGBP Spot rate ................................................................................................ 9 Figure 10. EURGBP forward contracts in points addition to the spot rate (1W-18M) ......... 9 Figure 11. EURGBP forward contracts in points addition to the spot rate (2Y-6Y) .......... 10 Figure 12. Frequency of invoices issued on Swedish Market ............................................. 11 Figure 13. Yearly distribution of issued invoices on Swedish Market ............................... 11 Figure 14. Frequency distribution of the difference between order and invoice issue (in
Load more

Recommended publications
  • Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States
    REPORT TO CONGRESS Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States U.S. DEPARTMENT OF THE TREASURY OFFICE OF INTERNATIONAL AFFAIRS December 2020 Contents EXECUTIVE SUMMARY ......................................................................................................................... 1 SECTION 1: GLOBAL ECONOMIC AND EXTERNAL DEVELOPMENTS ................................... 12 U.S. ECONOMIC TRENDS .................................................................................................................................... 12 ECONOMIC DEVELOPMENTS IN SELECTED MAJOR TRADING PARTNERS ...................................................... 24 ENHANCED ANALYSIS UNDER THE 2015 ACT ................................................................................................ 48 SECTION 2: INTENSIFIED EVALUATION OF MAJOR TRADING PARTNERS ....................... 63 KEY CRITERIA ..................................................................................................................................................... 63 SUMMARY OF FINDINGS ..................................................................................................................................... 67 GLOSSARY OF KEY TERMS IN THE REPORT ............................................................................... 69 This Report reviews developments in international economic and exchange rate policies and is submitted pursuant to the Omnibus Trade and Competitiveness Act of 1988, 22 U.S.C. § 5305, and Section
    [Show full text]
  • Central Bank Survey of Foreign Exchange and Derivatives Market Activity
    FR 3036 OMB No. 7100-0285 Hours per Response: 55.0 Approval expires: May 31, 2022 Instructions for the Central Bank Survey of Foreign Exchange and Derivatives Market Activity Turnover Survey April 2019 FR 3036 OMB No. 7100-0285 This report is authorized by law (12 U.S.C. §§ 225a and 263). Your voluntary cooperation in submitting this report is needed to make the results comprehensive, accurate and timely. The Federal Reserve may not conduct or sponsor, and an organization is not required to respond to, a collection of information unless it displays a currently valid OMB control number. The Federal Reserve System regards the individual institution information provided by each respondent as confidential [5 U.S.C. §552(b)(4)]. If it should be determine d that any information collected on this form must be released, other than in the aggregate in ways that will not reveal the amounts reported by any one institution, respondents will be notified. Public reporting burden for this collection of information is estimated to be 55 hours per response, including time to gather and maintain data in the proper form, to review instructions and to complete the information collection. Send comments regarding this burden estimate to: Secretary, Board of Governors of the Federal Reserve System, 20th and C Streets, NW, Washington, DC 20551; and to the Office of Management and Budget, Paperwork Reduction Project, (7100-0285), Washington, DC 20503. Turnover Survey FR 3036 April 2019 Instructions A. Introduction These instructions cover the turnover part of the survey. The turnover part of the survey will be conducted on a locational basis.
    [Show full text]
  • 2016 Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Market Activity Frequently Asked Questions and Answers
    Restricted 20 January 2016 2016 Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Market Activity Frequently asked questions and answers Table of Contents A. Risk categories ............................................................................................................... 3 1. Foreign exchange transactions: the reporting of gold ............................................ 3 B. Instruments ..................................................................................................................... 3 1. Reporting of currency options strategies ............................................................... 3 2. Reporting of FX swaps .......................................................................................... 3 3. Categorisation of currency swaptions and interest rate swaptions ........................ 4 4. Reporting of in/out swaps between CLS members ................................................ 4 5. Reporting of “cash/same day” transactions. .......................................................... 4 C. Counterparties ................................................................................................................ 4 1. Definition of reporting dealers ................................................................................ 4 2. The lists of reporting dealers for the two parts of the survey ................................. 5 3. Counterparties in a FX prime brokerage relationship ............................................ 5 4. Treatment of centrally cleared
    [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]
  • Introduction Section 4000.1
    Introduction Section 4000.1 This section contains product profiles of finan- Each product profile contains a general cial instruments that examiners may encounter description of the product, its basic character- during the course of their review of capital- istics and features, a depiction of the market- markets and trading activities. Knowledge of place, market transparency, and the product’s specific financial instruments is essential for uses. The profiles also discuss pricing conven- examiners’ successful review of these activities. tions, hedging issues, risks, accounting, risk- These product profiles are intended as a general based capital treatments, and legal limitations. reference for examiners; they are not intended to Finally, each profile contains references for be independently comprehensive but are struc- more information. tured to give a basic overview of the instruments. Trading and Capital-Markets Activities Manual February 1998 Page 1 Federal Funds Section 4005.1 GENERAL DESCRIPTION commonly used to transfer funds between depository institutions: Federal funds (fed funds) are reserves held in a bank’s Federal Reserve Bank account. If a bank • The selling institution authorizes its district holds more fed funds than is required to cover Federal Reserve Bank to debit its reserve its Regulation D reserve requirement, those account and credit the reserve account of the excess reserves may be lent to another financial buying institution. Fedwire, the Federal institution with an account at a Federal Reserve Reserve’s electronic funds and securities trans- Bank. To the borrowing institution, these funds fer network, is used to complete the transfer are fed funds purchased. To the lending institu- with immediate settlement.
    [Show full text]
  • The Foreign Exchange and Interest Rate Derivatives Markets
    The Foreign Exchange and Interest Rate Derivatives Markets: Turnover in the United States, April 2016 Federal Reserve Bank of New York Turnover in the United States, April 2016 The Foreign Exchange and Interest Rate Derivatives Markets: Turnover in the United States, April 2016 Background The Federal Reserve Bank of New York together with over fifty other central banks conducted a survey of turnover in the over-the-counter (OTC) foreign exchange and interest rate derivatives markets for April 2016. This worldwide, cooperative effort is undertaken every three years and is coordinated by the Bank for International Settlements (BIS). The “triennial survey” is a comprehensive source of information on the size and structure of the OTC foreign exchange and derivatives markets. To measure the OTC markets, the dealers that make markets in foreign exchange and interest rate derivatives reported trading volumes for April 2016 to the central banks in the countries where they are located. The participants reported separately the volume of trading they conduct with each other to permit adjustments for double reporting. The central banks then compiled national aggregates from the dealers’ data and the BIS compiled global totals from the central banks’ national data.1 (See Annex I for a complete description of survey terms and methods.) In 2016, a total of twenty-three dealers in the United States participated in the foreign exchange part of the survey and nineteen in the interest rate derivatives section, slightly changed from 2013, which had twenty-four and eighteen participating institutions respectively. Participating dealers were commercial banks, U.S. offices of foreign banking organizations, and securities brokers/dealers.
    [Show full text]
  • THE HIERARCHY of the OFFSHORE US-DOLLAR SYSTEM on Swap Lines, the FIMA Repo Facility and Special Drawing Rights
    Global Economic Governance Initiative GEGI STUDY | February 2021 THE HIERARCHY OF THE OFFSHORE US-DOLLAR SYSTEM On Swap Lines, the FIMA Repo Facility and Special Drawing Rights Steffen Murau, Fabian Pape and Tobias Pforr Funded by German Research Foundation Global Economic Governance Initiative GEGI STUDY | February 2021 THE HIERARCHY OF THE OFFSHORE US-DOLLAR SYSTEM On Swap Lines, the FIMA Repo Facility and Special Drawing Rights Steffen Murau, Fabian Pape and Tobias Pforr Funded by German Research Foundation Table of Contents Abbreviations v Executive Summary vi Acknowledgments vii 1. Introduction 01 2. The Fed’s Central Bank Swap Lines 08 Outline 08 Historical overview 08 Technical details 09 Summary 10 3. The Fed’s FIMA Repo Facility 11 Outline 11 Historical overview 11 Technical details 13 Summary 14 4. The Special Drawing Rights System 15 Outline 15 Historical overview 15 Technical details 17 Summary 20 5. Conclusion 21 References 23 About the Authors 27 iii List of Figures and Tables Figure 1 — The hierarchy of the global Offshore US-Dollar System 04 Figure 2 — Assessing the international role of the US-Dollar in 2019-20 07 Figure 3 — Drawings on Fed swap lines, volume and price (2007-20) 09 Figure 4 — Balance sheet mechanism for central bank swap issuance 10 Figure 5 — Investment in the Fed's Foreign Repo Pool (2007-20) 12 Figure 6 — US treasury bond holdings of selected non-US central banks 13 Figure 7 — Balance sheet mechanism for foreign repo facilities 14 Figure 8 — Three historical rounds of SDR allocation, in SDR billion
    [Show full text]
  • Proposal to Change the Swap Margin Rules
    59970 Proposed Rules Federal Register Vol. 84, No. 216 Thursday, November 7, 2019 This section of the FEDERAL REGISTER swap dealers under the agencies’ Regulations.gov Classic: Go to https:// contains notices to the public of the proposed respective jurisdictions to exchange www.regulations.gov/. Enter ‘‘Docket ID issuance of rules and regulations. The margin with their counterparties for OCC–2019–0023’’ in the Search Box and purpose of these notices is to give interested swaps that are not centrally cleared click ‘‘Search.’’ Click on ‘‘Comment persons an opportunity to participate in the (Swap Margin Rule). The Swap Margin Now’’ to submit public comments. For rule making prior to the adoption of the final rules. Rule as adopted in 2015 takes effect help with submitting effective under a phased compliance schedule comments please click on ‘‘View spanning from 2016 through 2020, and Commenter’s Checklist.’’ Click on the DEPARTMENT OF THE TREASURY the dealers covered by the rule continue ‘‘Help’’ tab on the Regulations.gov home to hold swaps in their portfolios that page to get information on using Office of the Comptroller of the were entered into before the effective Regulations.gov, including instructions Currency dates of the rule. Such swaps are for submitting public comments. grandfathered from the Swap Margin Regulations.gov Beta: Go to https:// 12 CFR Part 45 Rule’s requirements until they expire beta.regulations.gov/ or click ‘‘Visit according to their terms. The proposed New Regulations.gov Site’’ from the [Docket No. OCC–2019–0023] rule would permit swaps entered into Regulations.gov classic homepage.
    [Show full text]
  • Swap” Definition Takes Effect
    October 15, 2012 CFTC Relief and Guidance as the “Swap” Definition Takes Effect CFTC Issues Interpretive and No-Action Letters, and Responds to Questions Providing Guidance as the Definition of “Swap” Takes Effect SUMMARY The Securities and Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”, collectively with the SEC, “Commissions”)1 adopted rules further defining key terms under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) including “swap dealer”, “major swap participant”, “security-based swap dealer”, “major security-based swap participant” and “eligible contract participant” (the “Entity Definitions”), and subsequently adopted rules further defining additional key terms under Title VII of Dodd-Frank (“Title VII”) including “swap”, “security-based swap” and “mixed swap” (the “Product Definitions”).2 The Product Definitions generally took effect on October 12, 2012, triggering a number of regulatory obligations under Title VII, except that for purposes of certain relief from SEC requirements, the effective date of the definition of “security-based swap” will be February 11, 2013.3 On October 10-12, the CFTC issued an unprecedented 13 interpretive and no-action letters as well as three sets of responses to questions previously submitted by industry participants. The letters and other guidance provide clarifications and relief in a number of areas, including: Clarification as to the timing of certain restrictions relating to swap customer collateral. Temporary no-action relief applicable to transactions that may be exempt under pending proposals to exempt certain transactions in electricity markets and certain transactions involving not-for-profit electric cooperatives. Interpretive relief for certain real estate investment trusts (“REITs”) and securitization vehicles from meeting the definition of “commodity pool” under Section 1a(10) of the Commodity Exchange Act (“CEA”).
    [Show full text]
  • The Impact of Public Debt on Foreign Exchange Reserves and Central Bank Profitability: the Case of Hungary
    The impact of public debt on foreign exchange reserves and central bank profitability: the case of Hungary Gergely Baksay, Ferenc Karvalits and Zsolt Kuti1 Abstract This paper focuses on the interactions between public debt policy and foreign exchange reserve management. We found that, although foreign currency debt issuance can contribute significantly to the growth of foreign exchange reserves, it can cause serious difficulties in the assessment of reserve adequacy, especially during crisis periods. Furthermore, it affects the profit-loss of the central bank. On the other hand, the accumulation of foreign exchange reserves may affect the public deficit and debt as well. Based on these observations, we draw several lessons. We conclude that debt management policy may result in a suboptimal solution on a consolidated basis if the needs of reserve adequacy are not taken into account within the decision-making process for foreign currency debt issuance. In addition, we argue that, if the central bank wants to enhance its capacity to intervene during a crisis, it should seek to identify and utilise other sources of foreign exchange liquidity. But the options here are limited: we believe that the most appropriate tool that would enable a central bank such as the MNB to rapidly obtain an ample amount of foreign exchange reserves is a foreign exchange swap line provided by a developed country central bank. Keywords: Monetary policy, fiscal policy, public debt management, national budget, sovereign debt, foreign exchange reserve JEL classification: E52, E58, E62, E63, H63 1 Gergely Baksay is Senior Analyst, Ferenc Karvalits is Deputy Governor and Zsolt Kuti is Senior Economist.
    [Show full text]
  • Federal Register/Vol. 77, No. 224/Tuesday, November 20, 2012
    69694 Federal Register / Vol. 77, No. 224 / Tuesday, November 20, 2012 / Notices collection of information is necessary CEA, as well as Federal securities laws, (1) Whether the required trading and for the proper performance of the to provide a comprehensive regulatory clearing of foreign exchange swaps and functions of the Bureau, including regime for swaps. Section 721 of the foreign exchange forwards would create whether the information will have Dodd-Frank Act amends section 1a of systemic risk, lower transparency, or practical uses; (b) the accuracy of the the CEA, which, in relevant part, threaten the financial stability of the above estimate of the burden of the defines the term ‘‘swap’’ and includes United States; proposed information collection; (c) foreign exchange swaps and foreign (2) Whether foreign exchange swaps ways to enhance the quality, usefulness, exchange forwards in the definition.2 and foreign exchange forwards are and clarity of the information to be Section 1a(47)(E) of the CEA authorizes already subject to a regulatory scheme collected; and (d) ways to minimize the the Secretary to make a written that is materially comparable to that reporting burdens on respondents, determination that ‘‘foreign exchange established by the CEA for other classes including the use of automated swaps’’ 3 or ‘‘foreign exchange of swaps; collection techniques or other forms of forwards,’’ 4 or both— (I) should not be (3) The extent to which bank information technology. regulated as swaps under the CEA; and regulators of participants in the foreign Treasury Department PRA Clearance (II) are not structured to evade the exchange market provide adequate Officer: Robert Dahl, Department of the Dodd-Frank Act in violation of any rule supervision, including capital and Treasury, Room 11000, 1750 promulgated by the Commodity Futures margin requirements; Pennsylvania Avenue NW., Washington, Trading Commission (‘‘CFTC’’) pursuant (4) The extent of adequate payment DC 20220.
    [Show full text]
  • Swap Transaction General Disclosure Statement of Cargill Risk Management
    Swap Transaction General Disclosure Statement of Cargill Risk Management I. INTRODUCTION We, Cargill, Incorporated, by and through our Cargill Risk Management Business Unit, are providing you with this Swap Transaction General Disclosure Statement (“General Disclosure Statement”), which describes generally: (1) the material characteristics of a wide variety of Transactions (as defined below) that we may conduct with you; (2) the material risks of such Transactions; and (3) typical material incentives and conflicts of interest that we may have with respect to such Transactions. These Transactions may relate to Underliers (as defined below) related to one or more of the following classes of reference assets: commodities, foreign exchange rates and currencies. In addition, we may provide you with additional disclosure statements to supplement the transaction-specific information. This General Disclosure Statement should be read in conjunction with such disclosures. Please note that Transactions may give rise to significant risks and are intended primarily for knowledgeable and sophisticated parties willing to accept such risks and able to absorb the losses that may arise. Therefore, you should understand these risks before entering into any Transactions. In this General Disclosure Statement and any supplemental disclosure statement that expressly refers to this General Disclosure Statement: “we”, “our”, “ours”, and “us” refer to Cargill, Incorporated, by and through its Cargill Risk Management Business Unit, and each affiliate that may
    [Show full text]