Retail Investor .org : How to hedge foreign currency exposure

Search using keywords e. We are open Monday-Friday, 9: For further details or in order to establish a meeting, please contact us directly to: The client can use forward contracts to sell or purchase foreign currency amounts at a future time and a given exchange rate. The settlement takes place at the time and the exchange rate mentioned in the contract, regardless of any fluctuations of the exchange rate on the foreign exchange market. A flexible forward transaction has the same characteristics as a forward transaction with only one specific difference, which is that the settlement of the transaction can take place at any time until the maturity of the contract.

The client may choose to make partial settlements for his transaction at any time until the maturity of the contract, having the only obligation to exchange the entire notional amount until maturity. In order to have this right, the client pays a premium.

An option contract has the same functionality as an insurance contract. The client pays a premium in order to be able to take advantage of its right in case a certain event occurs.

Covered Interest Rate Parity

The CALL option gives its buyer the right and not the obligation to buy a specific amount of currency at a pre-established rate in exchange of a premium paid the cost of the option. The PUT option gives its buyer the right and not the obligation to sell a specific amount of currency at a pre-established rate in exchange of a premium paid the cost of the option.

A currency swap transaction represent an agreement to exchange one currency for another at an agreed upon exchange rate. There are two simultaneous transactions, one of buying and one of selling the same amount at two different value dates usually SPOT and FORWARD and at exchange rates SPOT and FORWARD that are pre-agreed at the moment when the transaction is closed.

In a currency swap, the holder of an unwanted currency exchanges that currency for an equivalent amount of another currency. Thus, the client exchanges his interest and currency rate exposures from one currency to another or benefits of bank financing at a lower rate.

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