HEDGING:[/b]
Hedging refers to a method of reducing the risk of loss caused by price fluctuation. Portfolio managers and corporations use hedging techniques to reduce their exposure to various risks.
RISK AND returns in the case of an investment are like the two sides of the same coin. Though high returns are the basic motive behind investment, the dodgy element of risk cannot be overlooked. Now, future is uncertain, so one has to protect oneself from future uncertainties. So one hedges against possible uncertainties and mitigates risk by counterbalancing.
Hedging is practiced in day-to-day life. For example, when we are kids, our parents get us vaccinated against many diseases so we are not affected by the said diseases in future. Another example is insurance. When people decide to hedge, they are insuring themselves against a negative event. This doesn’t prevent the negative event from happening; if it does happen but you’re properly hedged, the impact of the event is reduced. However in the financial market, hedging is more complicated than insurance; hedging against investment risk calls for using market instruments strategically to offset the risks arising from any adverse price movement.
HEDGING TOOLS:[/b]
¡ Risk shifting
¡ Currency risk sharing
¡ Currency collars
¡ Cross-hedging
¡ Exposure netting
¡ Forward market hedge
¡ Foreign currency options
v Risk shifting: It occurs if a person facing the possibility of an economic loss resulting from the occurrence of an insurance risk transfers some or all of the financial consequences of the potential loss to an insurer. The effect of such a transfer is that a loss by the insured will not affect the insured because the loss is offset by the insurance payment.
v Currency risk sharing: [/b]An agreement between two parties where they share the foreign exchange risk associated with a transaction. For example, a buyer in Britain and a seller in the United States may agree to split the difference between any gains or losses that may result from the sale of the good or service. Currency risk sharing reduces foreign exchange risk for both parties.
v Currency collars: [/b]Contract bought to protect against currency moves outside the neutral zone. Firm would convert its foreign currency denominated receivable at the zone forward rate. A protective options strategy that is implemented after a long position in a stock has experienced substantial gains. It is created by purchasing an out of the money put option while simultaneously writing an out of the money call option. A general restriction on market activities. It is also known as "hedge wrapper".
v Cross-hedging: [/b]Hedging one instrument's risk with a different by taking a position is a related derivatives contract. This is often done when there is no derivatives contract for the instrument being hedged, or a suitable derivatives contract exists but the market is highly illiquid. The success of cross-hedging depends completely on how strongly correlated the instrument being hedged is with the instrument which underlies the derivatives contract. Additionally, the credit of the derivative and the instrument being hedged needs to be similar and their markets need to be of similar liquidity, so that price changes are similar. Lastly, the maturity of the derivatives contract must be at least as long as the maturity of the desired hedge, otherwise the investor will be left with an unhedged exposure for a period of time.
v Exposure netting:[/b] Offsetting exposures in one currency with exposures in the same or another currency, when exchange rates are expected to move in such a way that losses or gains on the first exposed position should be offset by gains or losses on the second currency exposure.
v Forward market hedge: [/b]Market where dealers agree to deliver currency, commodities, or financial instruments at a fixed price at a specified future date. Most forward contracts are made for delivery at specific future dates, for example, one week from the transaction date, one month, and so on. Longer term contracts are more speculative in nature, and are substantially more risky.
v Foreign currency options: [/b]A Foreign Currency Option grants a customer the right, but not the obligation, to buy or sell foreign currency at a specified price within a specified period of time (American Option) or on a fixed date (European Option). The most common Foreign Currency Option is the European style. An option which gives the owner the right to buy or sell the indicated amount of foreign currency at a specified price before a specific date.
[/b]
[/b]
INTERNATIONAL SOURCES OF FUNDS AND MEDIUM OF FINANCING FOR CORPORATE:[/b]
[/b]
EURO MONEY MARKET[/b]
Euro Currency
Euro Deposits
Euro Loans
Euro Banking
The International Monetary Fund (IMF)[/b][/b]
• Set up in 1944 at the Bretton Woods Conference, New Hampshire.
• Set up to help put in place an economic structure that would help prevent
the problems experienced by many countries in the 1930s.
• Aims to stabilise the international monetary system and help when monetary flow
from trade causes problems.
• Provides help and advice as well as funds to countries experiencing balance of payments problems.
The World Bank[/b]
• The 5 institutions:
• The International Bank for Reconstruction and Development (IBRD) – provides loans and advice to poor countries to assist development.
• The International Development Association (IDA) – interest free credits and grants to countries that are not able to borrow through normal market channels.
• International Finance Corporation (IFC) – providing finance through the private sector for development.
• The Multilateral Investment Guarantee Agency (MIGA) – providing investors with protection against risk to promote investment in developing countries.
• The International Centre for the Settlement of Investment Disputes (ICSID) – arbitration service
in the event of investment disputes.
Special Drawing Rights (SDRs)[/b]
• Originally set up in 1969 to support fixed exchange rates
• Value based on a basket of international currencies – currently 1.24 SDRs to the £
•
Hedging refers to a method of reducing the risk of loss caused by price fluctuation. Portfolio managers and corporations use hedging techniques to reduce their exposure to various risks.
RISK AND returns in the case of an investment are like the two sides of the same coin. Though high returns are the basic motive behind investment, the dodgy element of risk cannot be overlooked. Now, future is uncertain, so one has to protect oneself from future uncertainties. So one hedges against possible uncertainties and mitigates risk by counterbalancing.
Hedging is practiced in day-to-day life. For example, when we are kids, our parents get us vaccinated against many diseases so we are not affected by the said diseases in future. Another example is insurance. When people decide to hedge, they are insuring themselves against a negative event. This doesn’t prevent the negative event from happening; if it does happen but you’re properly hedged, the impact of the event is reduced. However in the financial market, hedging is more complicated than insurance; hedging against investment risk calls for using market instruments strategically to offset the risks arising from any adverse price movement.
HEDGING TOOLS:[/b]
¡ Risk shifting
¡ Currency risk sharing
¡ Currency collars
¡ Cross-hedging
¡ Exposure netting
¡ Forward market hedge
¡ Foreign currency options
v Risk shifting: It occurs if a person facing the possibility of an economic loss resulting from the occurrence of an insurance risk transfers some or all of the financial consequences of the potential loss to an insurer. The effect of such a transfer is that a loss by the insured will not affect the insured because the loss is offset by the insurance payment.
v Currency risk sharing: [/b]An agreement between two parties where they share the foreign exchange risk associated with a transaction. For example, a buyer in Britain and a seller in the United States may agree to split the difference between any gains or losses that may result from the sale of the good or service. Currency risk sharing reduces foreign exchange risk for both parties.
v Currency collars: [/b]Contract bought to protect against currency moves outside the neutral zone. Firm would convert its foreign currency denominated receivable at the zone forward rate. A protective options strategy that is implemented after a long position in a stock has experienced substantial gains. It is created by purchasing an out of the money put option while simultaneously writing an out of the money call option. A general restriction on market activities. It is also known as "hedge wrapper".
v Cross-hedging: [/b]Hedging one instrument's risk with a different by taking a position is a related derivatives contract. This is often done when there is no derivatives contract for the instrument being hedged, or a suitable derivatives contract exists but the market is highly illiquid. The success of cross-hedging depends completely on how strongly correlated the instrument being hedged is with the instrument which underlies the derivatives contract. Additionally, the credit of the derivative and the instrument being hedged needs to be similar and their markets need to be of similar liquidity, so that price changes are similar. Lastly, the maturity of the derivatives contract must be at least as long as the maturity of the desired hedge, otherwise the investor will be left with an unhedged exposure for a period of time.
v Exposure netting:[/b] Offsetting exposures in one currency with exposures in the same or another currency, when exchange rates are expected to move in such a way that losses or gains on the first exposed position should be offset by gains or losses on the second currency exposure.
v Forward market hedge: [/b]Market where dealers agree to deliver currency, commodities, or financial instruments at a fixed price at a specified future date. Most forward contracts are made for delivery at specific future dates, for example, one week from the transaction date, one month, and so on. Longer term contracts are more speculative in nature, and are substantially more risky.
v Foreign currency options: [/b]A Foreign Currency Option grants a customer the right, but not the obligation, to buy or sell foreign currency at a specified price within a specified period of time (American Option) or on a fixed date (European Option). The most common Foreign Currency Option is the European style. An option which gives the owner the right to buy or sell the indicated amount of foreign currency at a specified price before a specific date.
[/b]
[/b]
INTERNATIONAL SOURCES OF FUNDS AND MEDIUM OF FINANCING FOR CORPORATE:[/b]
[/b]
EURO MONEY MARKET[/b]
The International Monetary Fund (IMF)[/b][/b]
• Set up in 1944 at the Bretton Woods Conference, New Hampshire.
• Set up to help put in place an economic structure that would help prevent
the problems experienced by many countries in the 1930s.
• Aims to stabilise the international monetary system and help when monetary flow
from trade causes problems.
• Provides help and advice as well as funds to countries experiencing balance of payments problems.
The World Bank[/b]
• The 5 institutions:
• The International Bank for Reconstruction and Development (IBRD) – provides loans and advice to poor countries to assist development.
• The International Development Association (IDA) – interest free credits and grants to countries that are not able to borrow through normal market channels.
• International Finance Corporation (IFC) – providing finance through the private sector for development.
• The Multilateral Investment Guarantee Agency (MIGA) – providing investors with protection against risk to promote investment in developing countries.
• The International Centre for the Settlement of Investment Disputes (ICSID) – arbitration service
in the event of investment disputes.
Special Drawing Rights (SDRs)[/b]
• Originally set up in 1969 to support fixed exchange rates
• Value based on a basket of international currencies – currently 1.24 SDRs to the £
•