International finance mangement Essay Example

Hedging Policies

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Hedging Policies

One of the hedging policies applied by organisations is the futures hedge whereby one purchases a currency futures contract(s) that is representative of the currency and amount which is related to the payables. This policy is advantageous to companies when the position they have taken protects them from future inflation in prices. However, a decrease in the prices of future currencies means that a firm cannot benefit since the price had already been set prior to the date. When such a position is taken, and it leads to a firm acquiring currency that it does not need due to a decrease in the number of projected sales, the firm finds itself in a compromised situation due to being locked in surplus forward contracts that may mean losing money and as such options are explored. Currency option hedge can hedge receivables via purchasing currency call option(s) or receivables via purchasing a currency put option(s). Such a policy, when actual sales volume exceeds the projected value of sales, and one is short of foreign currency; one can opt to buy extra volume favourably at spot rate if the exchange rate has moved out-of-money. In this case also, when sales come in lower than projected, one can also sell foreign currency at spot rate when one is not locked into a futures contract. However, there is a territory that is slippery in the hedging practice, where the volume is higher than projected and the currency rate moving in-the-money. This means that a firm ought to buy at a higher rate since the exchange has moved in-the-money, but this is offset by an increase in sales (Madura, 2008).

References

MADURA, J., & MADURA, J. (2008). International corporate finance. Australia, Thomson.