The document discusses various currency risks and hedging techniques. It begins by explaining that the Sri Lankan rupee has depreciated against the US dollar, which can be beneficial when receiving foreign income but costly when making foreign payments. It then discusses different types of currency risks like transaction risk and translation risk. The document outlines various hedging techniques to manage currency risk, including internal techniques like invoicing in home currency, leading/lagging payments, netting receivables and payables, and matching assets and liabilities across currencies. External hedging tools discussed are forward contracts, futures contracts, options, money market hedges, and swaps. The key purpose of hedging is to limit
This presentation covers foreign exchange risk definition, types, management and measurement. Hedging tools and techniques; both internal and external are also discussed.
Module - 1 :
The foreign exchange market, structure and organization- mechanics of currency trading
– types of transactions and settlement dates – exchange rate quotations and arbitrage – arbitrage with and without transaction costs – swaps and deposit markets – option forwards – forward swaps and swap positions – Interest rate parity theory.
This presentation covers foreign exchange risk definition, types, management and measurement. Hedging tools and techniques; both internal and external are also discussed.
Module - 1 :
The foreign exchange market, structure and organization- mechanics of currency trading
– types of transactions and settlement dates – exchange rate quotations and arbitrage – arbitrage with and without transaction costs – swaps and deposit markets – option forwards – forward swaps and swap positions – Interest rate parity theory.
International Financial Management ,International Money Market,International Capital Market,International Bond Market,Bench Marking,Euro currency Market
Used for MBA professional accounting class room presentation and it includes FASB rules and forex currency dealings details for purchase and sale of goods and services with foreign party.
Determination of exchange rate chapter 6Nayan Vaghela
Determination of exchange rate, mint par theory, balance of payment theory, Purchasing power parity theory, Absolute version and relative version, Criticisms
International Financial Management ,International Money Market,International Capital Market,International Bond Market,Bench Marking,Euro currency Market
Used for MBA professional accounting class room presentation and it includes FASB rules and forex currency dealings details for purchase and sale of goods and services with foreign party.
Determination of exchange rate chapter 6Nayan Vaghela
Determination of exchange rate, mint par theory, balance of payment theory, Purchasing power parity theory, Absolute version and relative version, Criticisms
Currency exchange and risk management - International Business - Manu Melwin Joymanumelwin
Transaction risk - This type of risk is primarily associated with imports and exports. If a company exports goods on credit then it has a figure for debtors in its accounts. The amount it will finally receive depends on the foreign exchange movement from the transaction date to the settlement date.
The PowerPoint presentation on derivatives and their various types, such as futures, options, swaps, and hedging, provides a comprehensive understanding of these financial instruments and their applications in risk management and investment strategies. The presentation begins by explaining the concept of derivatives, highlighting their role in managing price fluctuations, mitigating risks, and maximizing investment opportunities. It then delves into the different types of derivatives, starting with futures contracts that enable parties to buy or sell assets at predetermined prices and dates. The presentation further explores options, which grant the right but not the obligation to buy or sell assets, and swaps, which involve the exchange of cash flows based on predefined conditions. Additionally, it covers hedging, a risk management technique that uses derivatives to offset potential losses in investments. With clear explanations and illustrative examples, this presentation equips the audience with the knowledge necessary to navigate the world of derivatives and employ them effectively in financial decision-making.
2. Sri Lankan Rupee depreciates against the US Dollar
• Beneficial when receiving income through foreign currency.
• Costly when making foreign currency payments
Share market is highly sensitive
• Volkswagen share prices fell 23%(17.6 Billion $) after emissions test scandal.
130
132
134
136
138
140
142
LKR/USD
LKR/USD
• Transaction Risk
• Translation Risk
• Economic Risk
Currency Risks
Upside
Risk
Downside
Risk
“A form of risk that arises from the change in price
of one currency against another”
3. Hedging
• Internal Hedging techniques
• Invoicing in Home Currency
• Leading and Lagging
• Netting
• Matching
• External Hedging techniques
• Forward Contracts
• Futures Contracts
• Money Market Hedges
• Options
• Swaps
“Hedging is like Insurance”
A risk management strategy used in limiting or offsetting probability
of loss from fluctuations in the prices of commodities, currencies, or
securities.
Generally Hedging is carried out through the use of instruments
known as Derivatives
4. Internal Hedging Techniques
Invoicing in Home currency
Billing the customer in the local currency of the organization. Avoids risk of
exchange rate fluctuations.
Risk is passed on to the other party
Leading and Lagging
Leading -Creating a payment in advance to the official date, anticipating an
adverse exchange rate movement in future.
Lagging - Delaying a payment In order to benefit from favorable future exchange
rate movements
5. Internal Hedging Techniques
Netting
Netting is a technique of hedging exchange rate exposure by setting of receipts
and payments between different parties (Customers/suppliers, Subsidiaries) to
minimize the value exposed to exchange rate risks.
A Ltd (USA)
Millennium IT
(Sir Lanka)
B Ltd (USA)
$ 10,000
LKR
2,100,000
$ 10,000
A Ltd (USA)
Millennium IT
(Sir Lanka)
B Ltd (USA)
LKR 680,000
LKR/USD
142
6. Matching
This involve hedging the impact on assets and liabilities by creating
similar assets and liabilities.
Developed mainly to hedge Translation risk.
Internal Hedging Techniques
USA
Asset
Sri Lanka Liability
LKR/USD
USA
Asset Liability
7. External Hedging Techniques
Forward Contracts
A customized contract between two parties to buy or sell the underlying
asset at a specified price on a future date.
• A binding agreement by both parties
• Pre determined sum/value
• Pre determined rate
• Pre determined date(s) – Forward Options
• Customizable – Over the counter instrument
8. Futures Contracts
• Standard contract size
• Available only in certain currencies
• Tradable on the open market
• Initial margin required to enter into the contract
External Hedging Techniques
9. Options
An option is a contract that gives the buyer the right, but not the
obligation, to buy or sell an underlying asset at a specific price on or
before a certain date.
External Hedging Techniques
0
5
10
15
20
25
30
Share Price
Share Price
Option – Sell 1,000 shares at $20
Option cost – $200
1) $15
2) $25
Call Option - An agreement that gives an investor the right (but not the obligation) to buy a
stock, bond, commodity, or other instrument at a specified price within a specific time
period.
Put Option - An option contract giving the owner the right, but not the obligation, to sell a
specified amount of an underlying security at a specified price within a specified time.
10. Swaps
Swap refers to an exchange of one financial instrument for another
between the parties concerned.
Interest rate Swaps
Currency Swaps
External Hedging Techniques
A – LIBOR + 1.5%
– 10%
B – 8.5%
–LIBOR + 1%