Dr Ian GiddyNew York University Hedging Techniques 4 n rrnnn Techniques of Hedging Techniques of Hedging A brief comparison of hedging tools Forwards futures swaps ID: 95473
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Giddy | Hedging Dr. Ian GiddyNew York University Hedging Techniques 4 \n \r\r\n\n\n Techniques of Hedging Techniques of Hedging A brief comparison of hedging tools Forwards, futures, swaps Asset-liability matching Pricing and linkages among the tools Uses and abuses of options When to use, and when not to use Giddy | Hedging 5 \n \r\r\n\n\n What Hedging Instruments? What Hedging Instruments? What Protection Needed? Volatility & Direction OTC options,Caps and Floors Direction Forwards, Futures, Swaps Exotics, Hybrids, structured notes Complex risksOr arbitrage 6 \n \r\r\n\n\n Tools for Hedging Tools for Hedging Petrobrashas to pay for equipment from Japan, in Japanese yen, in 3 months Borrow and pay now?Use a forward contract/FX swap?Pay later at spot? Giddy | Hedging 7 \n \r\r\n\n\n Forward Contracts, Futures Forward Contracts, Futures and Money Market Hedging and Money Market Hedging Money market hedging: match currency of assets and liabilities Forwards: Agreement to exchange currencies at certain exchange rate in the future Futures: Exchange-traded contracts for notional future delivery, minimizing default risk via marking-to-market Currency swap: match payments on foreign-currency debt Interest-rate swap: change floating cost to fixed 8 \n \r\r\n\n\n A Typical Forward Exchange Contract A Typical Forward Exchange Contract We agree today to pay a certain price for a currency in the future Sony Sony B of A B of A JPY Giddy | Hedging 9 \n \r\r\n\n\n Forward Quotations Forward Quotations \n 10 \n \r\r\n\n\n The FX Swap Hedge The FX Swap Hedge 3-month Forward Contract3-month Swap l Dealers typically hedge a forward foreign-exchange commitment with a spot plus FX Swap: spot sale plus forward purchase of a foreign currency l The FX swap rate is determined by the interest differential Giddy | Hedging 11 \n \r\r\n\n\n The Roll The Roll - - Over Swap Hedge Over Swap Hedge 6-month Forward Contract3-month Swap3-month Swap l Dealers often hedge a long-term foreign-exchange commitment with shorter-term contracts, which are rolled overas they come due l Corporations themselves do this too. 12 \n \r\r\n\n\n Futures Futures Like Forwards, But Traded on an Exchange Like Forwards, But Traded on an Exchange \r\n Giddy | Hedging 13 \n \r\r\n\n\n A Currency Swap: Used to Hedge Debt A Currency Swap: Used to Hedge Debt Indosat Indosat BANK BANK IDR 100,000USD 10 Indosatissues dollar debt, but wants rupiahfinancingso exchanges its dollars for IDR equivalentat todays spot exchange rate USD 10 14 \n \r\r\n\n\n Periodic Exchange of Interest Periodic Exchange of Interest Indosat Indosat BANK BANK IDR 100,000USD 10 Indosat Indosat BANK BANK Fixed IDR 12%Floating USD3-mo Libor Giddy | Hedging 15 \n \r\r\n\n\n Three Parts of a Currency Swap Three Parts of a Currency Swap Indosat Indosat BANK BANK IDR 100,000USD 10 Indosat Indosat BANK BANK Fixed IDR 12%Floating USDLibor Indosat Indosat BANK BANK IDR 100,000USD 10 16 \n \r\r\n\n\n Interest Rate Swap Interest Rate Swap Giddy | Hedging 17 \n \r\r\n\n\n Swap Quotations Swap Quotations \n 18 \n \r\r\n\n\n Managing Exchange Risk: Managing Exchange Risk: Tools & Techniques Tools & Techniques Swaps Futures Forward contracts Symmetrical contracts Exotics Exchange-tradedoptions OTC options Kinky contracts BorrowingLending Giddy | Hedging 19 \n \r\r\n\n\n Spot, Forwards and Swaps in Indonesia Spot, Forwards and Swaps in Indonesia Forward and swap transactions are necessary for hedging But they are declining as a percentage of the total in Indonesia \n 20 \n \r\r\n\n\n Cost of Hedging Cost of Hedging is Neutral is Neutral Type of HedgeCost of Hedging ForwardForward premium Money Market Hedge(Borrow to matchassets)Interest ratedifferential Do nothingExpected rate ofchange ofexchange rate Giddy | Hedging10 22 \n \r\r\n\n\n When Should We Use Options to Hedge? When Should We Use Options to Hedge? FORWARDCONTRACT Petrobrashedging cost of Japanese debt 23 \n \r\r\n\n\n When Should We Use Options to Hedge? When Should We Use Options to Hedge? CALLOPTIONON YEN FORWARDCONTRACT Petrobrashedging cost of Japanese debt Giddy | Hedging11 24 \n \r\r\n\n\n Option Hedges Option Hedges Questions about options:-When should companies use them?-Which options?-How much do they cost? -Are they worth paying for? 25 \n \r\r\n\n\n Hockey Sticks Hockey Sticks CALLPUTBUYSELL Giddy | Hedging12 26 \n \r\r\n\n\n View on Direction, Volatility or Both? View on Direction, Volatility or Both? 27 \n \r\r\n\n\n The Hedging Choices The Hedging Choices NaturalHedge? NaturalHedge? Derivatives? Derivatives? Debt? Debt? or Giddy | Hedging13 28 \n \r\r\n\n\n A Hedging Roadmap A Hedging Roadmap Motivations for Hedge Driven by company views Volatility: options, Direction: forwards, debt Market risk remains Driven by company needs Company has economic exposure Company has natural hedge No need for hedging Forwards, swaps or debt 30 \n \r\r\n\n\n Prof. Ian GiddyNYU Stern School of BusinessTel +1.646.8080.746; Fax +1.866.369.9350ian.giddy@nyu.eduWeb: giddy.org Contact Contact