1 Foreign Exchange FOREX. 2 23. Forex Risk Management tool [Hedging tool] Internal Tools Neting Matching Leading & Legging Pricing / Invoicing External.

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Presentation transcript:

1 Foreign Exchange FOREX

2 23. Forex Risk Management tool [Hedging tool] Internal Tools Neting Matching Leading & Legging Pricing / Invoicing External Tools Currency Forwards (Forward Contract) Currency Option Currency Future Currency SWAP MMH (Money Market Hedge)

3 Exporter Foreign Currency Receivable Risk : FC Value Decreases Balance sheet : Liability Asset Liability Asset ---- Foreign Currency ---- Foreign CurrencyImporter Foreign Currency Payable Risk : FC Value Increases Balance sheet : Liability Asset Liability Asset Foreign ---- Foreign ---- Currency Currency

4 Hedging : Borrow Foreign Currency equivalent to the Present Value of FC to be received. Borrow Foreign Currency equivalent to the Present Value of FC to be received. Convert FC to Home Currency Convert FC to Home Currency Repay Loan in FC when you receive your FC payment. Repay Loan in FC when you receive your FC payment. Hedging : Borrow Home Currency equivalent to the Present Value of FC to be payable. Borrow Home Currency equivalent to the Present Value of FC to be payable. Convert Home Currency Borrowing to FC. Convert Home Currency Borrowing to FC. Deposit FC in the Foreign Country. Deposit FC in the Foreign Country. Repay FC when the date of payment become due. Repay FC when the date of payment become due. When IRP Theory is not valid than only Forward cover and MMH will give Different Result.

5 Netting Vs Matching Netting : Under this process payable & receivables are adjusted and net balance is settled. Under this process payable & receivables are adjusted and net balance is settled. As a result of this no. of transaction is reduced and hence there is saving of transaction cost. As a result of this no. of transaction is reduced and hence there is saving of transaction cost. Matching : (Hedging Tool) Under matching process receivables and payables are matched in order to decide the net forex exposure amount. However transaction are settled separately and hence there is no transaction cost saving. Bilateral One-to-one One party receivable & payables with other party is adjusted and balance amount is settled. Multilateral One-to-many One party receivable & payables with all other parties are adjusted and balance amount is settled.