As a hedge against currency risks


Part 2. Sophisticated strategies

In a previous publication, "Sun" is a simple explanation of hedging the currency risk of the importing company - forwards, futures and options. In the second part we are talking about complex strategies using structured derivatives.

Structure with a "zero cost"

Home unpleasant feature a simple call option, which makes it difficult to use for the purpose of hedging - the high cost. So, just a month call option dollar / euro at the money (that is, when the exercise price at the date of acquisition is taken equal to the current spot), the average cost of 1% to 2% of the hedged amount.

Longer options are even more expensive. If companies need to regularly hedge their currency risks, the costs of option premium can be quite substantial. Realizing this, major international banks have met clients and offer the so-called structure with a "zero cost".

One of these structures is the option "cylinder".

The essence of the scheme - the buyer wants to hedge itself against the growth, for example, the euro against the dollar, but do not want to pay a large premium for a simple call option. Then the bank has to sell a call option for free, provided that the company at the same time the bank will sell a put option (the so-called financing option).

Consider an example.

Moscow textile company expects delivery consignment from France. Appropriate vendor account in the amount of 5,000,000 euros is payable within 3 months. The company's budget for the current financial year provides for the euro at 1.2. However, the risk of euro above 1.2, and thus the occurrence of exchange rate losses. To minimize this risk, the company buys a call option of the bank three dollar / euro with a strike price of 1.2.

Thus, if after three months the euro will rise above 1.2, say, 1.3, the company is implementing an option (ie, the right), and receives from the bank euros for dollars at the rate of 1.2. However, in order to avoid paying for it right around $ 75 million (the call option premium), the company is selling the bank-put option with a strike price of 1.11 (the obligation to buy euros for dollars at the rate of 1.11 when the rate will be lower, for example , 1.1, 1.09, etc.). The second option - it is the financing option, which makes this scheme free for a textile company. On the one hand, the company pays a premium to have purchased a call option, and the other, received the award from the bank for the sold put option. When properly chosen the second option exercise price premium balance each other (this example is calculated at the current rate at the time of both transactions as 1.145).

However, mention should be made of existing enterprise risk - if the euro falls below the 1.11, then the company will be forced to buy the euro at the rate of 1.11, which does not allow her to participate in a favorable kursovom movement.

More common in Russia

Consider the reverse situation is more typical for Russia. Russian oil exporting company expects receiving of 50,000,000 euros in 3 months. Budget rate for the current financial year, the company set at 1.10. If the exchange rate falls below 1.10, the oil exporters will receive a dollar amount less than EUR 50 million. The problem is the same - free hedge against the fall of the euro. Solution - buy a put option with a three-month strike price of 1.10 (the right to sell the bank euros for dollars at the rate of 1.10 in three months) and the sale of a three-month call option with a strike price of 1.2 (obligation to buy dollars for euros at the rate of 1.2, if the rate is higher).

So, the option "cylinder":

- Provides an opportunity to participate in the positive movement of the exchange rate to the exercise price of the option sold (ie up to a financing option exercise price);

- In the event of adverse movements in exchange rates provides a guaranteed rate hedging (which acts as a hedge price of the option).

Option "cylinder" - a structure with a "zero cost", ie the purchase option of the variety fails to pay the premium.

Option "cylinder" can be any width financing rates as high as possible (by choosing a financing option exercise price) by exchange rate hedging (ie hedging the option exercise price).

Barrier options

Another possibility to reduce the cost of simple call and put options for hedging organizations are called Barrier options, knock-in and knock-out. Barrier options - traditional option is to "appear" (knock-in) or "disappear" (knock-out) if the current rate for a specified rate (barrier or trigger). When the trigger american current rate must touch the trigger once, at any time during the life of the option. Consider the use of knock-out option on the example of the textile companies that need to hedge the payment of EUR 5 million in three months of growth in the euro / dollar. A classic of the payment options hedging involves buying a call option by the dollar / euro price of $ 02.01 for 1 euro (remember, this is a budget of course, above which there are unplanned exchange losses). Terms such option will be approximately as follows: exercise price - $ 02.01, the amount of - EUR 5 million, the term - three months, the trigger level - 1.25. The latter means that if the rate will rise above $ 1.25, the option disappears, and the company is left alone with its own currency risk. But if the exchange rate remains in the corridor of 1.2-1.25, the bank will put the euro against the dollar at the rate of 1.2.