Hedging Currency Risk with Options and Futures
October 1999
The high volatility of exchange rates is a fact of life faced by any company engaged in international business. When buying or selling products in a foreign currency, there is always a risk that the settlement price will differ from the invoice price after translation into Canadian dollars, which can pose a significant obstacle to effective cash flow management. Businesses that source products from foreign countries face the risk that exchange rate movements will erode gross margins if competition prevents selling prices from rising in tandem, while resource-based companies face the uncertainty associated with the fact that the world's commodities markets are denominated in US dollars or pounds sterling while their costs are often denominated in Canadian dollars or other local currencies. Businesses that ignore exchange rate volatility expose themselves to unnecessary risk, which could have significant consequences if exchange rates suddenly move unfavourably.
In the resource sector, declining commodity prices have been tempered by a low Canadian dollar. Because commodities such as lumber, base metals, and oil are traded in US dollars, Canadian producers have benefited from the low exchange rate, and have therefore not been overly eager to reduce their exposure to US dollars. As the dollar is tied to the commodity cycle, however, a recovery in the resource sector could put upward pressure on the Canadian dollar, which would have a negative impact on producers' revenues when translated from US to Canadian dollars.
While commodity prices tend to be influenced by broad economic factors on the demand side and environmental factors (weather, natural disasters) on the supply side, currencies are influenced by a much broader set of factors, including central bank policy, interest rates, current account balances and other macroeconomic indicators. Exchange rate volatility is compounded by the fact that all factors that influence a currency's value have to be evaluated relative to every other currency – or at least every other major currency that is actively traded. While the commodity price cycle tends to be highly correlated with the world economic cycle – which stands to reason given that demand for commodities is based on demand for global production – there is no corresponding currency cycle, which makes it that much more difficult to anticipate what the value of any particular currency may be one month, six months, or twelve months down the road.
Currency Risk
Any company that conducts at least some of its business in another currency is exposed to currency risk (or foreign exchange risk, or exchange rate risk). However, this risk is present only if the company's sales currency differs from the company's cost currency – if a company's revenues and expenses are both denominated in the same foreign currency, there is no foreign exchange risk. There are two types of currency risk: transaction risk and translation risk. Transaction risk refers to actual conversions of cash flows from one currency to another, and the extent to which exchange rate changes will affect a company's cash flow. Translation risk is more of an accounting issue, and refers primarily to the impact of exchange rates on earnings and balance sheet items when consolidating financial statements from foreign subsidiaries. From a business standpoint, transaction risk is the more relevant of the two.
Imports and exports are the primary source of foreign exchange risk among Canadian businesses. An importer who sources products from abroad typically pays for them in the local currency of the supplier then sells them in Canadian dollars at home. If the local currency appreciates relative to the dollar, the importer must either raise prices at home to maintain margins, or contend with a reduction in profit. If the product faces competition in Canada from other importers or domestic producers, raising prices is not always an option. Similarly, if selling prices are contracted in advance, there is no opportunity to recover the foreign exchange loss that would results from an appreciation of the local currency. Canadian exporters face the same risk, but in reverse: a depreciating Canadian dollar is beneficial if they are receiving funds in foreign currency, but a depreciating foreign currency will erode margins when foreign currency revenues are translated back into Canadian dollars. The risk extends beyond the volatility of revenues and gross margins. Uncertain future exchange rates pose an obstacle to maintaining long-term supply contracts with retailers and wholesalers, since companies would not want to lock themselves into contracts that could potentially fix selling prices below exchange rate adjusted costs.
Financial institutions and other businesses are exposed to currency risk whenever they borrow or lend in a foreign currency or hold foreign assets. From either side of a foreign currency loan transaction, a business is exposed to risk in the sense that interest and principal payments will be affected by the prevailing exchange rate at the payment date. Without a foreign currency revenue stream to service loan payments, a borrower must translate Canadian dollars into foreign currency at whatever rate is in effect when the payments come due. Similarly, without a foreign currency liability that exactly offsets outstanding loan receipts, a lender will receive an interest stream that varies with the exchange rate. The value of foreign assets will rise and fall with exchange rates, which can be a relevant consideration if the assets are held for short-term investment purposes.
Resource-based businesses routinely hedge their exposure to both commodity price fluctuations and exchange rate movements. Because commodity prices and exchange rates fluctuate while costs remain relatively fixed, producers need to minimize the volatility of selling prices in order to achieve earnings and cash flow stability. A commodity-based business that fails to hedge is exposed to adverse price movements that may impede its ability to meet its fixed costs. Businesses that use commodities as inputs – energy products in particular – face similar exposure, and regularly enter into hedging strategies that minimize the impact of rising prices on their operating costs. While in most cases the primary variable being hedged is the commodity price, firms doing business in currencies other than the US dollar face exchange rate risk on top of commodity price risk, and must hedge this risk separately.
What is Hedging?
Currency hedging refers to a strategy that strives to minimize the exposure to exchange rate fluctuations, thereby minimizing the uncertainty of future transactions denominated in a foreign currency and providing some stability to earnings and cash flow. This is typically accomplished through the use of options or futures contracts. Forward contracts can also be used to hedge currency risk. However, while forward contracts are superior to futures in terms of their overall risk reduction, there is no central market for forward contracts, which contributes to higher transaction costs and lower liquidity, as well as counterparty risk (i.e. the risk that the contract will not be honoured at expiration). When a business chooses to hedge its exposure to foreign currency, the objective is to minimize uncertainty, not to maximize profit from currency speculation. A hedged position will therefore not produce the benefit of a favourable exchange rate movement, but at the same time will not expose the hedger to the loss potential of an unfavourable exchange rate movement.
The underlying principle of a hedging strategy is to construct a portfolio consisting of a long position in the foreign currency asset and a short position in a foreign currency asset such that gains on one offset losses on the other. This is achieved by using derivatives whose price movements are highly correlated with movements in the spot market. Ideally, the derivative being used to hedge will have the same underlying currency as the foreign currency asset being hedged, since the price movements of the two assets would be highly similar.
Futures Contracts
A futures contract is a standardized commitment that describes the key features of a transaction:
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The quantity and quality of the commodity being exchanged
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The date on which the exchange is to take place
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The method of delivery
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The price at which the commodity will be purchased
Futures contracts are highly standardized, and are available only for fixed quantities of a commodity of uniform quality. Expiration dates follow a cycle – typically once a quarter for currencies, but sometimes as often as once a month for other commodities – and always fall on a certain business day of the expiration month, such as the third Wednesday, the last Friday or the seventh last business day of the month. The settlement price is established on the date the contract is initiated, and represents the price the holder of the contract will pay for the commodity at the expiration date, regardless of what the commodity price happens to be at that time.
Between the date on which the contract is purchased and the expiration date, gains or losses on the futures contract are settled in cash. If the futures price increases, the holder receives the difference between yesterday's price and today's price from the futures exchange. If the futures price decreases, the daily difference is deduced from the margin in the holder's trading account. The sum of all daily gains and losses will equal the net change in the futures price over the life of the contract. This daily recontracting is called 'marking to market'.
The difference between the price of a commodity in the cash (or 'spot') market and the futures market is called the 'basis', and is determined by relative interest rates for financial futures. The price is established by an arbitrage argument which asserts that the payoff from converting a unit of domestic currency at the spot rate, lending in another currency and converting the proceeds in the forward market should yield the same profit as lending the unit of domestic currency at home – provided he or she can borrow and lend at the risk-free rate. Using S as the spot rate, F as the forward rate – both in terms of domestic currency per unit of foreign currency – r as the domestic effective interest rate and rf as the foreign effective interest rate, the above equality produces the identity:
If this condition does not hold, then arbitrageurs would take advantage of the opportunity by borrowing unlimited amounts in the country with low interest rate, investing in the country with the high interest rate and converting at the forward rate for a risk-free profit. This would lead to an adjustment in the exchange rate until the opportunity was no longer profitable. This relationship is more commonly known as 'interest rate parity'. Slight deviations from parity may be apparent in the market due to transaction costs.
Interest rate parity is a relationship between interest rates, spot rates and the forward rate. Because futures contracts and forward contracts both specify a price at which a transaction is settled at some future date, and since the net change in the futures price should yield the same payoff to the holder, their prices should be fairly similar. The one distinction between the two types of contracts is that futures entail daily marking to market while forward contracts are settled only at expiration. Even though interest is earned on futures profits, this should not affect futures prices relative to forward prices if expected interest earnings are offset by expected interest payments over the life of the contract. If, however, futures prices are affected by interest rates, such that net interest receipts do not have an expected value of zero, then futures prices may differ from forward prices. For all intends and purposes, however, the differences will be small, and forward and futures prices can be regarded as equal.
One final feature of futures contracts to note is that the basis – (F-S) using the above notation – approaches zero as the contract nears expiration. In other words, the futures price at the expiration date must equal the spot price. This follows from the interest rate parity identity above: as time to expiration approaches zero, the effective interest rates will approach zero, since effective interest rates are a function of time to expiration.
Constructing a Risk Minimizing Hedge
As stated earlier, the objective of hedging is to minimize risk, not to maximize profits from currency speculation. Using futures contracts, this is typically accomplished by taking a short position in the futures market to offset any gains or losses in the spot market. From a portfolio perspective, the hedger would have a portfolio consisting of a long position in the cash market, and a short position in the futures market. The return on the portfolio is equal to the return on the spot position (denoted S) plus the return on the futures position (denoted F):
where h denotes the number of futures contracts held in the portfolio, or the 'hedge ratio'. In most instances, h will be negative, depicting a short position. The optimal value for h is the one that minimizes the variance of the portfolio:
Taking the first derivative with respect to h and setting it equal to zero yields the hedge ratio that minimizes the portfolio variance:
where h* is the variance-minimizing hedge ratio. Because spot prices and futures prices are highly correlated, h* should be fairly close to –1.
The hedge ratio is calculated using historical returns in the cash and futures market. Since exchange rate levels exhibit non-stationarity (i.e. they can deviate from their long-term mean level for prolonged periods of time), means and variances are not meaningful unless returns are used. The covariance between cash returns and futures returns is assumed to be relatively stable over the hedging horizon, although hedge ratios can be dynamically updated over the hedging horizon if one wants a more precise hedge. More complicated models that strive to more accurately model exchange rate dynamics using multivariate and autoregressive statistical techniques can be employed to derive a more efficient hedge ratio estimate, although for most practical purposes, the simple model described above will suffice.
While the hedge ratio tends to be close to 1 when the spot and futures positions are denominated in the same currency, it is not always possible to trade futures on a given currency. Currency futures are available for most major currencies, but when a firm is exposed to a currency that can't be hedged directly in the futures market, it is sometimes necessary to hedge a cash position in one currency with a futures position in another currency. In these instances, the hedge ratio becomes important, since the two exchange rates will not necessarily move in tandem. The variance-minimizing hedge ratio determines the optimal number of futures contracts that are required to hedge the cash position, based on the extent to which the spot rate in the one currency and the futures rate in the second currency move together. When one uses futures in a one currency to hedge exposure in another currency, this is known as 'cross hedging'.
Numerical Example
To demonstrate the benefits of hedging, consider a firm with a US$1 million receivable due in 90 days. At the prevailing exchange rate of 0.6800 USD/CAD, the receivable is worth $1,470,588. However, for every basis point the Canadian dollar appreciates within the next three months, the receivable loses $2,150 in value. In order to offset any potential losses in the value of the US dollar receivable, the firm could use Canadian dollar futures to hedge its exposure. Each Canadian dollar futures contract is worth $100,000, and every basis point change in the futures price (quoted in US dollars) is equal to US$10.
The simple hedging model would entail the purchase of 15 Canadian dollar futures contracts to hedge US$1 million in exposure. This figure is found by dividing the face value of the exposure (US$1 million = $1,470,588) by the contract value ($100,000) and rounding to the nearest contract. If the Canadian dollar appreciates within the next three months, the futures position will gain US$150 for every basis point decrease in the USD/CAD exchange rate (US$10 times 15 contracts).
In the above scenario, a hedge ratio of 1 was assumed. A variance minimizing model calculates the hedge ratio that will minimize the variance of the cash and futures positions within a single portfolio. In this example, the hedge ratio that minimizes portfolio variance is equal to 0.999, which is found by calculating the covariance and variances of the spot and futures rates over a fixed time interval. Thus, in the simple example, every US$1 of exposure was hedged with US$1 in the futures market; the minimum variance hedge would use US$0.999 in futures for every US$1 of exposure. Because the hedge ratio is close to 1 in this example, it isn't going to have much effect on the overall result – the optimal futures position continues to be 15 Canadian dollar futures. However, in larger transactions, or in transactions for which the hedge ratio is not so close to 1, the minimum variance model should prove to be superior to the simple model.
Table 1 shows the basic structure of this hedging example. In this example, the initial spot rate is 0.6800 USD/CAD and the initial forward rate is 0.6830 USD/CAD. The first column presents a range of possible spot prices at the end of the 90-day horizon, and the second column is the CAD value of the US$1 million receivable at that time. If the Canadian dollar appreciates by just 25 basis points over this time interval, the receivable decreases in value by over $5,000. The fourth column presents a range of possible futures prices at the end of the 90-day horizon, based on the assumption of a fixed basis of 20 points above the spot rate (this is an arbitrary number for illustrative purposes only). For every basis point above or below the original futures price of 0.6830 USD/CAD, the futures position gains or loses US$150 (US$10 times 15 contracts). Combining the spot value and the futures gains or losses for each possible spot price yields the portfolio's net value in the final column. Although the portfolio value is always below the unhedged receivables value if the spot rate remains the same, the relevant observation is the fact that the hedged portfolio value remains more or less constant no matter what the prevailing spot price may be. In this example, the hedged portfolio is not completely constant for any spot rate only because it entails some approximation in the number of contracts and in the hedge ratio. Chart 1 plots the value of the unhedged receivable against the value of the hedged receivable for a range of possible exchange rates that may prevail at the end of the 90-day period.
| Spot Rate USD/CAD |
Unhedged Receivable |
Gain/Loss Cash |
Futures Rate USD/CAD |
Gain/Loss Futures |
Hedged Receivable |
| 0.6500 | 1538462 | +67873 | 0.6520 | -71538 | 1466923 |
| 0.6525 | 1532567 | +61979 | 0.6545 | -65517 | 1467050 |
| 0.6550 | 1526718 | +56129 | 0.6570 | -59542 | 1467176 |
| 0.6575 | 1520913 | +50324 | 0.6595 | -53612 | 1467300 |
| 0.6600 | 1515152 | +44563 | 0.6620 | -47727 | 1467424 |
| 0.6625 | 1509434 | +38846 | 0.6645 | -41887 | 1467547 |
| 0.6650 | 1503759 | +33171 | 0.6670 | -36090 | 1467669 |
| 0.6675 | 1498127 | +27539 | 0.6695 | -30337 | 1467790 |
| 0.6700 | 1492537 | +21949 | 0.6720 | -24627 | 1467910 |
| 0.6725 | 1486989 | +16401 | 0.6745 | -18959 | 1468030 |
| 0.6750 | 1481482 | +10893 | 0.6770 | -13333 | 1468148 |
| 0.6775 | 1476015 | +5427 | 0.6795 | -7749 | 1468266 |
| 0.6800 | 1470588 | 0 | 0.6820 | -2206 | 1468382 |
| 0.6825 | 1465202 | -5387 | 0.6845 | +3297 | 1468498 |
| 0.6850 | 1459854 | -10734 | 0.6870 | +8759 | 1468613 |
| 0.6875 | 1454546 | -16048 | 0.6895 | +14182 | 1468727 |
| 0.6900 | 1449275 | -21313 | 0.6920 | +19565 | 1468841 |
| 0.6925 | 1444043 | -26545 | 0.6945 | +24910 | 1468953 |
| 0.6950 | 1438849 | -31739 | 0.6970 | +30216 | 1469065 |
| 0.6975 | 1433692 | -36896 | 0.6995 | +35484 | 1469176 |
| 0.7000 | 1428571 | -42012 | 0.7020 | +40714 | 1469286 |
| 0.7025 | 1423488 | -47101 | 0.7045 | +45907 | 1469395 |
| 0.7050 | 1418440 | -52149 | 0.7070 | +51064 | 1469504 |
| 0.7075 | 1413428 | -57161 | 0.7095 | +56184 | 1469611 |
| 0.7100 | 1408451 | -62138 | 0.7120 | +61268 | 1469718 |
Aggregating Exposure over Multiple Transactions
While the preceding example demonstrates the effectiveness of hedging when a firm is faced with a single cash flow, the foreign currency exposure of most firms is not that simple. Rather, firms typically have both inflows and outflows of foreign currency, and these amounts will vary from month to month. Hedging each individual cash flow would be both cumbersome and costly. One way to hedge aggregate exposure is sum the inflows and outflows for each period and hedge them collectively -- if net exposure is US$50,000 in the first month from one transaction, -US$75,000 in the second month from five transactions, and -US$25,000 in the third month from ten transactions, a hedger would enter into one hedge per month rather than sixteen individual hedges for each inflow and outflow.
On the surface, it may seem that a firm with the above net cash flows has no US dollar exposure, since the sum of the exposures in the three months is zero. However, this ignores the impact of interest rates. In the first month, the firm has a net inflow of US dollars, which can earn interest to offset some of the exposure in the second and third months. Since interest rates can shift, a firm with multi-period foreign currency cash flows faces both exchange rate risk and interest rate risk, both of which must be taken into consideration when formulating a hedging strategy. Hedging the net cash flows in each of the three months individually is the simplest way to eliminate both types of risk.
Hedging with Options
While forwards and futures are the most effective instruments used to minimize the volatility of an exposed foreign currency transaction, they may not be appropriate for all types of foreign exchange risk management. Their biggest limitation is the fact that they do not provide the opportunity to benefit from favourable foreign exchange movements. One can argue that unless a company is engaged in the currency speculation business, foreign exchange gains should be a secondary concern, although a counter argument is that managers should care only about downside risk since nobody will penalize them for making too much money. Another limitation of forwards and futures is that they may not match the contingent nature of some foreign currency transactions. If, for example, a firm enters into a short futures position to hedge an anticipated inflow that fails to materialize, there will be no gains to offset futures losses if the exchange rate appreciates.
Currency options give the holder the right, but not the obligation, to buy or sell a fixed amount of foreign currency at a specified price. 'American' options are exercisable at any time prior to the expiration date, while 'European' options are exercisable only on the expiration date. Most currency options have 'American' exercise features. Call options give the holder the right to buy foreign currency, while put options give the holder the right to sell foreign currency. Call options make money when the exchange rate rises above the exercise price (allowing the holder to buy foreign currency at a lower rate), while put options make money when the exchange rate falls below the exercise price (allowing the holder to sell foreign currency at a higher rate). If the exchange rate doesn't reach a level at which the option makes money prior to expiration, it expires worthless – unlike forwards and futures, the holder of an option does not have an obligation to buy or sell if it is not advantageous to do so.
Numerical Example
Consider the same firm as the previous example, with a receivable of US$1 million due in 90 days. Using options rather than futures, management would like to minimize its downside risk in the event that the Canadian dollar appreciates, yet at the same time benefit from any depreciation that may occur within the next three months.
To hedge its downside risk, the firm would buy three month Canadian dollar call options, which would give them the right to buy Canadian dollars at a specified price at any time prior to the expiration date. While the firm can specify what price it wants to lock in, the most common strategy is to buy calls with a strike price at or very close to the prevailing exchange rate ('at-the-money' options). Because Canadian dollar options cover a face value of $100,000, the firm would need to buy 15 call options to cover its US$1 million exposure (US$1 million = $1,470,588). The premium paid for these options would be around US$0.80 per $1,000, or $17,647.06.
In 90 days, the call option will have some value if the Canadian dollar has appreciated (since it allows the holder to buy Canadian dollars at a more favourable rate). Even if the prevailing exchange rate is less than the strike price, the option may still have some residual value based on the remaining time to expiration and the volatility in the underlying currency. For strike prices that are well above the prevailing exchange rate, the probability of making money on the option becomes so low that the option value is effectively zero.
Table 2 outlines the payoff structure of the option hedge. As before, the unhedged position can lose up to $62,000 if the exchange rate appreciates to 0.7100 USD/CAD. The third column represents the hypothetical prices of a Canadian dollar call option with a strike price of 0.6800 USD/CAD for each spot rate. These option prices are based on an assumed annual interest rate of 5% and exchange rate volatility of 7%, and the option is assumed to have one week to expiration. If the exchange rate remains at 0.6800 USD/CAD, each option is worth about US$0.30, reflecting the time value remaining in the option. For spot rates above 0.6800 USD/CAD, the option value increases to reflect both the time value remaining in the option and the intrinsic value of the option if exercised immediately. If the exchange rate falls, then the option loses its value, but since the holder simply doesn't exercise when this happens, the maximum loss is the premium paid when the option was purchased.
Chart 2 shows the payoff pattern for the hedged and unhedged positions. When the Canadian dollar depreciates, the loss on the option position is limited to the premium paid, which allows the hedger to benefit from the increase in value of the US dollar receivable. When the Canadian dollar appreciates, however, losses on the receivable are offset by gains on the call options. Chart 3 shows the net payoffs of the futures and the option hedges. While options can lose up to the premium paid, futures can lose infinite amounts, depending on how far the exchange rate depreciates. This is a relevant consideration if there is any uncertainty about the transaction being hedged – if for some reason the US$1 million receivable failed to come through and the firm had already hedged it, the futures hedge could entail a much more significant loss than the option hedge if the Canadian dollar had depreciated by a large amount.
| Spot Rate USD/CAD |
Unhedged Receivable |
Gain/Loss Cash |
Option Price |
Gain/Loss Option |
Hedged Receivable |
| 0.6500 | 1538462 | +67873 | 0.00 | -17647 | 1520815 |
| 0.6525 | 1532567 | +61979 | 0.00 | -17647 | 1514920 |
| 0.6550 | 1526718 | +56129 | 0.00 | -17647 | 1509071 |
| 0.6575 | 1520913 | +50324 | 0.00 | -17646 | 1497511 |
| 0.6600 | 1515152 | +44563 | 0.00 | -17641 | 1491809 |
| 0.6625 | 1509434 | +38846 | 0.00 | -17625 | 1486184 |
| 0.6650 | 1503759 | +33171 | 0.00 | -17576 | 1480682 |
| 0.6675 | 1498127 | +27539 | 0.01 | -17445 | 1475393 |
| 0.6700 | 1492537 | +21949 | 0.02 | -17144 | 1470458 |
| 0.6725 | 1486989 | +16401 | 0.05 | -16531 | 1466055 |
| 0.6750 | 1481482 | +10893 | 0.10 | -15427 | 1462358 |
| 0.6775 | 1476015 | +5427 | 0.18 | -13656 | 1459487 |
| 0.6800 | 1470588 | 0 | 0.30 | -11102 | 1457453 |
| 0.6825 | 1465202 | -5387 | 0.45 | -7749 | 1456162 |
| 0.6850 | 1459854 | -10734 | 0.64 | -3692 | 1455446 |
| 0.6875 | 1454546 | -16048 | 0.85 | +900 | 1455116 |
| 0.6900 | 1449275 | -21313 | 1.08 | +5840 | 1455014 |
| 0.6925 | 1444043 | -26545 | 1.32 | +10970 | 1455014 |
| 0.6950 | 1438849 | -31739 | 1.57 | +16179 | 1455028 |
| 0.6975 | 1433692 | -36896 | 1.82 | +21403 | 1455095 |
| 0.7000 | 1428571 | -42012 | 2.07 | +26611 | 1455182 |
| 0.7025 | 1423488 | -47101 | 2.32 | +31788 | 1455276 |
| 0.7050 | 1418440 | -52149 | 2.57 | +36931 | 1455371 |
| 0.7075 | 1413428 | -57161 | 2.82 | +42039 | 1455466 |
| 0.7100 | 1408451 | -62138 | 3.07 | +47110 | 1455561 |
Conclusion
Canadian firms whose revenues are denominated primarily in US dollars have benefitted from the depreciation of the Canadian dollar that coincided with the slump in commodity prices. Because US dollar exposure has generated foreign exchange gains for many Canadian companies, they have not devoted much effort to hedging their currency risk, since to do so would be to give back these gains. With economic recovery taking place in Asia, however, commodity prices may soon make a meaningful recovery, which could lead to an appreciation of the Canadian dollar in world currency markets. If this happens, firms whose revenues are denominated in US dollars and other foreign currencies may find themselves facing losses on foreign exchange unless they make a meaningful effort to hedge their foreign currency exposure.
Hedging is about reducing volatility rather than maximizing profit. By hedging currency exposure, firms give up the opportunity to realize gains from positive currency movements, but at the same time protect themselves against negative currency movements. In doing this, firms can add stability to their earnings and cash flow, which is a key factor underlying market valuations.
There are a number of ways to hedge foreign currency exposure, and the best choice for a given firm depends on that firm's objectives and the nature of its exposure. Futures and options are the most common instruments used to hedge currency risk, although strategies based on these instruments can range from a basic short hedge in the futures market to a continuously updated minimum variance model using sophisticated statistical algorithms.
J. Marlowe, MA, MSc
jmarlowe@goldencapital.com