Managing Exchange Rate Risk. Hedging

In general, hedging is a technique of insurance against loss from future price movements. For instance, in Britain in 1970s, when inflation was rampant, people (to buy) property because they thought I that it (to keep) its value even if notes and coins did not. Their property was a hedge against future inflation.

Hedging is widely applied in commodity and financial markets, as well as in international trade. Exchange rates between currencies (to fluctuate) over time and companies engaged in international business I (to expose) to exchange rate risk.

International companies can lower exchange rate risk exposure by hedging.

As to companies involved in international trade, i.e. purchasing goods from a foreign supplier, they can use two basic hedging techniques to protect themselves against transaction exposure:

a) Execute a contract in the forward exchange market, or in the foreign exchange futures market.

Currency contracts for future delivery (to trade) on many organized futures exchanges. Futures contracts (to standardize) with respect to the amount of a foreign currency to be delivered to the buyer from the seller and with respect to the time of delivery. In contrast, forward contracts can be set for any specific amount and any future time of delivery, although they normally are set for 30, 60 or 90 days in the future.

b) Borrow funds and invest in interest-bearing securities.

This technic is called a money market hedge. In that case a firm Purchasing some goods (to borrow) the funds from its bank, (to ^change) them for the needed currency at the spot rate, and invests it in interest-bearing securities of the Supplier's country. By investing in securities that mature on the same date as the payment is due to the Supplier, the purchaser (to have) the necessary amount of currency Available to pay for the goods.

Firms with direct investment in foreign subsidiaries also (to face) exchange rate risk in the form of translation exposure. Changes in the exchange rate (to affect) the value of the subsidiary's assets and liabilities and, ultimately, the income of the multinational parent company. A company can hedge against translation exposure by financing its foreign assets with debt denominated in the same currency.

A multinational company can also minimize its exchange rate risk by developing a portfolio of foreign investments. The firm should spread its foreign investments among a number of different countries thus limiting the risk of losses in one country.

Words you may needs:

Англiйский варiант	Росiйський варiант	Український варiант
to manage the risk	управлять риском	управляти ризиком
rampan	безудержный, быстро расширяющийся	нестримний, швидко розширяється
over time	со временем	з часом
interest-bearing securities	процентные ценные бумаги	процентні цінні папери
mature	подлежать оплате, подлежать погашению	підлягати оплаті, підлягати погашенню
hedge (against)	хеджировать	хеджувати

Ex. 9.

a) Fill each gap with a suitable word from the box.

b) Sum up the text in 5-7 sentences. Present your sentences to the class.

c) Describe the basic functions of the Eurocurrency markets.

function	conducted	restrictions
try	need	organized
borrow	offer	perform
deal	leading	client
bank	borrowers	operating