As a hedge against currency risks

Part 1. Solution of the problem

Given: a large Russian importer of electrical equipment is payable on contracts with European suppliers, expressed in euros. Management reporting company is in dollars, and when the euro rising against the U.S. dollar, the exchange rate losses are formed. Depending on the market conditions in the euro monthly payments of $ 10.5 million Foreign exchange losses for the previous year, due to the appreciation of the euro against the dollar by 23%, approximately $ 5 million Importer works on terms of commercial lending - deferment of payment upon delivery of the goods is 1-3 months.

Required to optimize the exchange rate losses, so that the amount was either minimized or known in advance at the beginning of the financial year for the whole period.

What course will the future bring

The company faced a large exchange losses over a year ago (in June 2002 began a sharp fall in the dollar against the euro). There are several ways to solve this problem within the business enterprise.

First, it is a strategy of compensation, which adjusts the ruble prices for the equipment to be purchased for euros, in line with growth in the euro / dollar. However, this simple approach was ineffective - the price of the company's products have a high degree of elasticity. In other words, raising prices, the company teryala market share, and thus profits. Another solution - to change the currency of payment for contracts with European suppliers to the euro for dollars. However, suppliers have refused to accept payment in dollars, for fear of exchange losses. The only thing possible - to limit the share of euro payments in the total share of foreign currency payments. So, having tried all the available non-financial ways, the company decided to seek to hedge currency risks of financial instruments. The first thing that came to mind financiers - must balance the company's liabilities in euro assets also in euros. But payable in euros in Russian importer can not be balanced by accounts receivable in the euro, as All sales are to customers in rubles.

Can, then why not buy assets denominated in euro - then the bill or bond exchange losses on payments in euros will be offset by increases in the market value of the securities. However, this option required a diversion of the company in the amount of future payments in euros. Unfortunately, the importer could not afford to hold the securities for $ 10.6 million addition, investments in securities involve risk and low returns.

Finally, it was clear that the assets in the euro cover losses only in short term (month, two, three), and for the year, the company will still receive exchange losses (cumulatively). Option - at the beginning of the year to just buy assets in euros for the full amount of future payments for the year, but it's a huge amount. Another scheme - to take in the bank and keep on deposit loan, denominated in euros. On loan (say, the ruble) can be purchased Eurobonds, which are then easily lay in providing the loan.