1. Nguyen Thi Thanh Thuy Ewha 082BAG03
Foreign Exchange Risk
Nguyen Thi Thanh Thuy
Ewha 082BAG03

2. Outline
I. Foreign exchange risk introduction II. Foreign exchange risk management

3. I. Foreign exchange risk introduction
From perspective of each trading role
Risk to investor
French investor acquired a yen-denominated Japanese bond
1 Yen = EUR
1 Yen = EUR
Risk to issuer
IBM issues bonds denominated in euros
1.34 USD = 1 EUR
1.4 USD = 1 EUR
The risk that a currency’s value may change adversely
Fixed amount of Yen  Investor gains a smaller amount of EUR than before
Fixed amount of EUR  Issuer must spend a larger amount of USD than before

4. II. Foreign exchange risk management
4 Instruments for hedging foreign exchange risk:
Currency forward contracts
Currency futures contracts
Currency options
Currency swaps

5. Currency Forward versus Future Contracts
An agreement to buy or sell an amount of foreign exchange at a specified price at a designated date in the future
Not attractive for hedging long-dated foreign currency exposure

6. Currency Forward versus Future Contracts
Forward Contracts
Future Contracts
Characteristic
Nonstandardized Agreement
Standardized Agreement
Location
Negotiated directly between banks and clients (buyer and seller)
Traded on organized exchanges (International Monetary Market)
Maturity
- Less than 2 years
- Delivery on any date
- Longest is 1 year
- Delivery on one of four maturity dates per year (March-June-September-December)
A future contract is considered an exchange-traded product
A forward contract is an over-the-counter instrument

7. Currency Option Contracts
A contract which gives the option buyer the right either to buy or to sell a foreign currency at a designated price in the future.
Two types of foreign currency options
Options on foreign currency
Future options
Traded both on the organized exchanges and in the OTC market

8. The best way to explain a currency swap
Currency swaps
The best way to explain a currency swap

9. Currency swaps
A currency swap is effectively a package of currency forward contracts, but allows hedging of long-dated exchange risk
A currency swap is more transactionally efficient than futures or forward contracts

10. Thank You