Part 1. Solution
Given the large Russian importer of electrical equipment is payable on contracts with European suppliers, expressed in euros. Management reporting company is in dollars, and when the euro rising against the U.S. dollar, exchange rate losses are formed. Depending on the market monthly payments in euros is $ 10.5 million loss on exchange last year, fueled by growth in the euro against the dollar by 23% and amounted to about $ 5 million Importer is operated by a commercial lending - the postponement of payment upon delivery of goods is 1-3 months.
Required to optimize the exchange losses so that the amount was either minimized or known in advance at the beginning of the fiscal year for the entire period.
What course especially for you
The company was faced with large exchange loss over a year ago (in June 2002 began a sharp drop in the dollar to the euro). There are several ways to solve this problem within the framework of business enterprise.
First, a strategy of compensation, which involves adjusting ruble prices for equipment purchased for the euro, in line with the growth rate eurodollar. However, this simple approach proved to be ineffective - the price of the company's products have a high degree of elasticity. In other words, rising prices, the company teryala market share, and hence profits. Another solution - change the currency of payment for contracts with European suppliers to the euro for dollars. However, suppliers have refused to accept payment in U.S. dollars, for fear of currency fluctuations. The only thing that could - limit the share of payments in euros in total foreign currency payments. So, having tried all the available non-financial ways, the company decided to apply to hedging currency risk financial instruments. The first thing that occurred to financiers - must balance the company's liabilities in euro assets also in euros. But the amount payable in euros at the Russian importer can not be balanced by receivables in euros, as all sales to customers are in rubles.
Perhaps, then why not buy assets denominated in euros - a bill or bond then exchange losses on euro payments will be offset by increasing the market value of securities. However, this option required a diversion of the company in the amount of future payments in euros. Unfortunately, the importer could not afford to hold the securities for $ 10.6 million addition, investments in securities involve risk and low returns.
And finally, it was clear that the assets in the euro cover losses only a short time (month, two, three), and year-end the company will still receive exchange losses (cumulatively). Possible - early in the year immediately buy assets in euros for the full amount of future payments for the year, but it is a huge sum. Another option - take the bank and keep on deposit, loan, denominated in euros. On loan (say, a ruble) to buy Eurobonds, which are then easily lay in the provision of credit.
Unfortunately, the scheme with a loan has several shortcomings excessive lending affects the capital structure (ie, making the company less attractive to investors), and also requires time to pass the credit committee at the bank. Therefore the government will soon start in earnest to consider options for hedging through currency forwards, derivatives, options, futures and swaps.
Derivatives Market
It is known that the secondary market of financial instruments (namely the so-stands, the term "derivatives") ended in Russia after the 1998 crisis, in fact, has not begun. After a sharp devaluation of the ruble, many Russian banks have been forced to abandon their commitments to supply dollars on forward contracts dollarrubl which they concluded before the crisis. Moreover, domestic courts have recognized forwards transactions "bet", ie not justiciable. Thus, the legitimacy of such operations was staged in Russia in serious doubt. There was no way. Steels developed hedging scheme using derivatives, began negotiations with the banks. Most were Western banks, as Russia did not offer similar products - partly because of post-crisis fears, partly because of the absence from the country market for these instruments, and hence can not override their risks of legal obligations.
So, forward.
Forward - this is an urgent transaction where buyer and seller agree on the delivery of the underlying asset (in our case - the euro against the U.S. or rubles) on a specified date in the future, while the base price established at the time of the transaction. Forwards - it is always counter products. In practice, it looks like. The company makes a deal with the bank for the supply of euros for dollars, say, a month later. Go negotiated rate - say, $ 1.1 per euro. If a month's course is $ 02.01 per euro, the company will save 10 cents on every dollar. With $ 1 million in savings of $ 100 thousand If the exchange rate will fall to parity (11), the company's losses would amount to the same $ 100 thousand and to avoid these losses (in case of devaluation) can not forward - this commitment (so-called problem could be solved structured, forward and options - but this topic for the next item). In addition, the forward, there are two unpleasant properties. First, is the need to pass the credit committee at the bank, which sells forward (the bank is required to assess the credit risk of the buyer). Secondly, the forwards have a negative impact on the liquidity of the company. For example, the situation has changed, and delivery euro was not needed (eg, payment in Euro supplier, under which was bought forward, canceled or rescheduled to a later date). What then do nothing, the company is obliged to put their dollars and get unnecessary euro. In short, the striker was highly inconvenient product, even though forwards are mostly in the Derivatives Market.
Futures - this is also an urgent transaction. Futures different from the forward that this exchange product, which means that the conditions (time, amount) are standardized. In addition, the buyer makes a payment center exchange margin, as well as adverse movements in exchange rate (in the case described - the growth of the dollar against the euro) variation margin, which guarantees the fulfillment of obligations bought futures to the seller. If the dollar depreciates, then the variation margin is already making a seller.
Claims against the futures are the same as for a forward - the possibility of unlimited loss (though, futures, unlike forwards traded on the exchange every day and could theoretically be sold before the date of execution - that in reality it is unlikely because it requires active speculation placing stop-loss, etc.), as well as the need to divert funds for the payment of margins and generally underdeveloped market futures exchange in Russia. Currency futures are traded only on two grounds - the MICEX and the SPCE.
The liquidity of the market (in fact, trade - the number of daily transactions, as well as applications for pokupkuprodazhu futures) of these markets is in its infancy. Currency swaps - kind of financial transactions in which a buyer (seller) of currency at the time of purchase (sale) undertakes a short-term sell (buy) the same currency. Swap market in Russia there is little, except interbank swaps. Structured as derivatives, such as Zero-cost Collar, Convertible-Forward, etc., due to its complexity and exoticism to be considered separately.
Output found
Currency call option dollarevro with calculations in rubles! It is this product was offered the company one of the transnational banks. Type Writer - pickup, ie involving the supply of the euro against the dollar. Instead, dollars could be put rubles (at the current rate). What is the convenience of such a scheme for the company The first option - a right, not an obligation. That is the situation changes with the liquidity of the option can be waived. Secondly, the Bank has offered to acquire options on any amount and timing. Thirdly, of the option can not be unlimited losses because the responsibility of the buyer is only paying the initial premium (option value), which is about 1.5% on a month's time at the current rate (known at the money). Options for longer periods, two months and more, are more expensive. Paid a bonus, according to a new tax code, can be attributed to the cost - in the event that it was hedging, not speculation, it is easy to prove the provision of a contract with the supplier of the euro, which was purchased under the option. Scheme with deliverable options easily modified in the scheme with non deliverable options, where there is no movement of currencies, but only arbitration. Call option buyer receives the difference between a strike (contractual rate) and spot (current price) in the event that spot above the strike price. However, the Tax Code of non deliverable option have to be a product of the exchange, but this is easily overcome if to start a transaction, which actually lies between the customer and the bank, the stock exchange. The only negative option - this product is worth more than the forward or futures, which, however, it is clear the right is always more expensive commitments.
Thus, the solution was found, and the company in the new year regularly hedge their foreign exchange exposure, which helps it to avoid exchange losses. Moreover, hedging is happening in Russia, rather than on foreign offshore, which is an undoubted advantage and competitive advantage.
Part 2. Complex strategies
In a previous publication of the Sun "talked about simple ways to hedge currency risk of the company-importer - forwards, futures and options. In the second part of the article speaks about the complex strategies using structured derivatives.
Structures with a "zero cost"
Home unpleasant feature a simple call option (Fig. 1), which makes it difficult to use in order to hedge - high cost. Thus, a simple call option month dollar / euro at the money (ie, when the exercise price at the date of purchase is taken equal to the current spot) in the average cost of 1% to 2% of the hedged amount.
Valyunye call and put options
Longer options are even more expensive. If a company needs to routinely hedge their currency risks, the costs of option premium can be quite significant. Knowing this, major international banks have made concessions to customers and offered so-called structure with "zero cost".
One such structure is an option "cylinder" (Fig. 2).
The essence of the scheme - the buyer wants to hedge themselves from the growth of, say, the euro's appreciation against the dollar, but do not want to pay a big premium on a simple call spread. Then the bank offers to sell the call option for free, if this company while the bank will sell a put option (the so-called financing option).
Structure option Cylinder
Consider an example. Moscow Textile Company expects to receive the consignment from France. The corresponding vendor account the amount of 5,000,000 to be paid in euros within 3 months. The budget for the current fiscal year provides for the euro at 1.2. However, there is a risk of euro above 1.2, and hence of currency fluctuations. To minimize this risk, the company buys the bank's three-month call option dollar / euro with an exercise price 1.2.
Thus, if after three months of the euro will rise above 1.2, say, up to 1.3, the company sells an option (that is their right), and receives from the bank euros for dollars at the rate of 1.2. However, in order to avoid paying for it right around $ 75 thousand (premium call spread), the company sells the bank put option with a strike price of 1.11 (the obligation to buy euros for dollars at the rate of 1.11 in that case, if the rate will be lower, eg , 1.1, 1.09, etc.). The second option - it is the financing option that makes this scheme free of charge for the textile company. On the one hand, the company pays a premium on the bought call spread, but on the other hand, receives a premium from the bank for the sold put option. When correctly selected the second option exercise price premium balance each other (this example is calculated at the current price at the time of the two transactions as 1.145).
However, mention should be made to existing enterprise risk - if the euro upadaet below 1.11, the company will have to buy the euro at 1.11, which does not allow her to participate in a favorable exchange rate movement.
More typical for Russia
Consider the opposite situation, more typical for Russia. The Russian company, oil exporter, expects to receive the amount of 50,000,000 Euros in 3 months. Fiscal policy for the current fiscal year the company set at the level of 1.10. If the rate falls below 1.10, then the oil exporter will receive a dollar less than the 50 million euros. The task of the old - free of charge to hedge against falling euro. The solution - buy a three-month put option with a strike price of 1.10 (the right to sell euros for dollars to the bank at the rate of 1.10 in three months) and the sale of a three-month call option with a strike price of 1.2 (obligation to buy dollars for euros at the rate of 1.2, if the rate is higher).
So, the option "cylinder":
- Provides an opportunity to participate in the positive movement of the exchange rate to the price performance of the sold option (ie, before the funding option exercise price);
- In case of adverse movements in exchange rates provides a guaranteed rate hedging (which acts as a hedge option exercise price).
Option "top hat" - a structure with "zero cost", ie purchase option of the variety buyer pays a premium.
Option "cylinder" can be any width financing rates as high as possible (the choice of funder option exercise price) by changing the course of hedging (ie the exercise price hedge option).
Barrier options
Another possibility to reduce the cost of simple call and put options to hedge the organization are called Barrier options Knock Knock in and out. Barrier options - a traditional option, which "appear" (NOC-ins) or "disappear" (Knock Out) if the current rate respect the agreed rate (the barrier, or trigger). When a trigger current American-style course has to touch the trigger once at any time during the life of the option. Consider the use of option Knock out the example of textile companies, which need to hedge the payment of 5 million euros over three months from the growth of the euro / dollar. The classic hedge of the payment options includes the purchase by call option dollar / euro with an exercise price of $ 1.2 for 1 euro (recall that the fiscal policy of the company, above which there are unanticipated exchange losses). Terms and conditions of such option will be approximately as follows: the exercise price - $ 1.2, the amount - 5 million euros, term - three months, the trigger level - 1.25. This means that if the rate will rise above $ 1.25, the option disappears, and the company remains a one on one with its own currency risk. But if the rate will remain in the corridor of 1.2-1.25, the bank will put the euro against the dollar at the rate of 1.2.
Alex Viazovsky
Given the large Russian importer of electrical equipment is payable on contracts with European suppliers, expressed in euros. Management reporting company is in dollars, and when the euro rising against the U.S. dollar, exchange rate losses are formed. Depending on the market monthly payments in euros is $ 10.5 million loss on exchange last year, fueled by growth in the euro against the dollar by 23% and amounted to about $ 5 million Importer is operated by a commercial lending - the postponement of payment upon delivery of goods is 1-3 months.
Required to optimize the exchange losses so that the amount was either minimized or known in advance at the beginning of the fiscal year for the entire period.
What course especially for you
The company was faced with large exchange loss over a year ago (in June 2002 began a sharp drop in the dollar to the euro). There are several ways to solve this problem within the framework of business enterprise.
First, a strategy of compensation, which involves adjusting ruble prices for equipment purchased for the euro, in line with the growth rate eurodollar. However, this simple approach proved to be ineffective - the price of the company's products have a high degree of elasticity. In other words, rising prices, the company teryala market share, and hence profits. Another solution - change the currency of payment for contracts with European suppliers to the euro for dollars. However, suppliers have refused to accept payment in U.S. dollars, for fear of currency fluctuations. The only thing that could - limit the share of payments in euros in total foreign currency payments. So, having tried all the available non-financial ways, the company decided to apply to hedging currency risk financial instruments. The first thing that occurred to financiers - must balance the company's liabilities in euro assets also in euros. But the amount payable in euros at the Russian importer can not be balanced by receivables in euros, as all sales to customers are in rubles.
Perhaps, then why not buy assets denominated in euros - a bill or bond then exchange losses on euro payments will be offset by increasing the market value of securities. However, this option required a diversion of the company in the amount of future payments in euros. Unfortunately, the importer could not afford to hold the securities for $ 10.6 million addition, investments in securities involve risk and low returns.
And finally, it was clear that the assets in the euro cover losses only a short time (month, two, three), and year-end the company will still receive exchange losses (cumulatively). Possible - early in the year immediately buy assets in euros for the full amount of future payments for the year, but it is a huge sum. Another option - take the bank and keep on deposit, loan, denominated in euros. On loan (say, a ruble) to buy Eurobonds, which are then easily lay in the provision of credit.
Unfortunately, the scheme with a loan has several shortcomings excessive lending affects the capital structure (ie, making the company less attractive to investors), and also requires time to pass the credit committee at the bank. Therefore the government will soon start in earnest to consider options for hedging through currency forwards, derivatives, options, futures and swaps.
Derivatives Market
It is known that the secondary market of financial instruments (namely the so-stands, the term "derivatives") ended in Russia after the 1998 crisis, in fact, has not begun. After a sharp devaluation of the ruble, many Russian banks have been forced to abandon their commitments to supply dollars on forward contracts dollarrubl which they concluded before the crisis. Moreover, domestic courts have recognized forwards transactions "bet", ie not justiciable. Thus, the legitimacy of such operations was staged in Russia in serious doubt. There was no way. Steels developed hedging scheme using derivatives, began negotiations with the banks. Most were Western banks, as Russia did not offer similar products - partly because of post-crisis fears, partly because of the absence from the country market for these instruments, and hence can not override their risks of legal obligations.
So, forward.
Forward - this is an urgent transaction where buyer and seller agree on the delivery of the underlying asset (in our case - the euro against the U.S. or rubles) on a specified date in the future, while the base price established at the time of the transaction. Forwards - it is always counter products. In practice, it looks like. The company makes a deal with the bank for the supply of euros for dollars, say, a month later. Go negotiated rate - say, $ 1.1 per euro. If a month's course is $ 02.01 per euro, the company will save 10 cents on every dollar. With $ 1 million in savings of $ 100 thousand If the exchange rate will fall to parity (11), the company's losses would amount to the same $ 100 thousand and to avoid these losses (in case of devaluation) can not forward - this commitment (so-called problem could be solved structured, forward and options - but this topic for the next item). In addition, the forward, there are two unpleasant properties. First, is the need to pass the credit committee at the bank, which sells forward (the bank is required to assess the credit risk of the buyer). Secondly, the forwards have a negative impact on the liquidity of the company. For example, the situation has changed, and delivery euro was not needed (eg, payment in Euro supplier, under which was bought forward, canceled or rescheduled to a later date). What then do nothing, the company is obliged to put their dollars and get unnecessary euro. In short, the striker was highly inconvenient product, even though forwards are mostly in the Derivatives Market.
Futures - this is also an urgent transaction. Futures different from the forward that this exchange product, which means that the conditions (time, amount) are standardized. In addition, the buyer makes a payment center exchange margin, as well as adverse movements in exchange rate (in the case described - the growth of the dollar against the euro) variation margin, which guarantees the fulfillment of obligations bought futures to the seller. If the dollar depreciates, then the variation margin is already making a seller.
Claims against the futures are the same as for a forward - the possibility of unlimited loss (though, futures, unlike forwards traded on the exchange every day and could theoretically be sold before the date of execution - that in reality it is unlikely because it requires active speculation placing stop-loss, etc.), as well as the need to divert funds for the payment of margins and generally underdeveloped market futures exchange in Russia. Currency futures are traded only on two grounds - the MICEX and the SPCE.
The liquidity of the market (in fact, trade - the number of daily transactions, as well as applications for pokupkuprodazhu futures) of these markets is in its infancy. Currency swaps - kind of financial transactions in which a buyer (seller) of currency at the time of purchase (sale) undertakes a short-term sell (buy) the same currency. Swap market in Russia there is little, except interbank swaps. Structured as derivatives, such as Zero-cost Collar, Convertible-Forward, etc., due to its complexity and exoticism to be considered separately.
Output found
Currency call option dollarevro with calculations in rubles! It is this product was offered the company one of the transnational banks. Type Writer - pickup, ie involving the supply of the euro against the dollar. Instead, dollars could be put rubles (at the current rate). What is the convenience of such a scheme for the company The first option - a right, not an obligation. That is the situation changes with the liquidity of the option can be waived. Secondly, the Bank has offered to acquire options on any amount and timing. Thirdly, of the option can not be unlimited losses because the responsibility of the buyer is only paying the initial premium (option value), which is about 1.5% on a month's time at the current rate (known at the money). Options for longer periods, two months and more, are more expensive. Paid a bonus, according to a new tax code, can be attributed to the cost - in the event that it was hedging, not speculation, it is easy to prove the provision of a contract with the supplier of the euro, which was purchased under the option. Scheme with deliverable options easily modified in the scheme with non deliverable options, where there is no movement of currencies, but only arbitration. Call option buyer receives the difference between a strike (contractual rate) and spot (current price) in the event that spot above the strike price. However, the Tax Code of non deliverable option have to be a product of the exchange, but this is easily overcome if to start a transaction, which actually lies between the customer and the bank, the stock exchange. The only negative option - this product is worth more than the forward or futures, which, however, it is clear the right is always more expensive commitments.
Thus, the solution was found, and the company in the new year regularly hedge their foreign exchange exposure, which helps it to avoid exchange losses. Moreover, hedging is happening in Russia, rather than on foreign offshore, which is an undoubted advantage and competitive advantage.
Part 2. Complex strategies
In a previous publication of the Sun "talked about simple ways to hedge currency risk of the company-importer - forwards, futures and options. In the second part of the article speaks about the complex strategies using structured derivatives.
Structures with a "zero cost"
Home unpleasant feature a simple call option (Fig. 1), which makes it difficult to use in order to hedge - high cost. Thus, a simple call option month dollar / euro at the money (ie, when the exercise price at the date of purchase is taken equal to the current spot) in the average cost of 1% to 2% of the hedged amount.
Valyunye call and put options
Longer options are even more expensive. If a company needs to routinely hedge their currency risks, the costs of option premium can be quite significant. Knowing this, major international banks have made concessions to customers and offered so-called structure with "zero cost".
One such structure is an option "cylinder" (Fig. 2).
The essence of the scheme - the buyer wants to hedge themselves from the growth of, say, the euro's appreciation against the dollar, but do not want to pay a big premium on a simple call spread. Then the bank offers to sell the call option for free, if this company while the bank will sell a put option (the so-called financing option).
Structure option Cylinder
Consider an example. Moscow Textile Company expects to receive the consignment from France. The corresponding vendor account the amount of 5,000,000 to be paid in euros within 3 months. The budget for the current fiscal year provides for the euro at 1.2. However, there is a risk of euro above 1.2, and hence of currency fluctuations. To minimize this risk, the company buys the bank's three-month call option dollar / euro with an exercise price 1.2.
Thus, if after three months of the euro will rise above 1.2, say, up to 1.3, the company sells an option (that is their right), and receives from the bank euros for dollars at the rate of 1.2. However, in order to avoid paying for it right around $ 75 thousand (premium call spread), the company sells the bank put option with a strike price of 1.11 (the obligation to buy euros for dollars at the rate of 1.11 in that case, if the rate will be lower, eg , 1.1, 1.09, etc.). The second option - it is the financing option that makes this scheme free of charge for the textile company. On the one hand, the company pays a premium on the bought call spread, but on the other hand, receives a premium from the bank for the sold put option. When correctly selected the second option exercise price premium balance each other (this example is calculated at the current price at the time of the two transactions as 1.145).
However, mention should be made to existing enterprise risk - if the euro upadaet below 1.11, the company will have to buy the euro at 1.11, which does not allow her to participate in a favorable exchange rate movement.
More typical for Russia
Consider the opposite situation, more typical for Russia. The Russian company, oil exporter, expects to receive the amount of 50,000,000 Euros in 3 months. Fiscal policy for the current fiscal year the company set at the level of 1.10. If the rate falls below 1.10, then the oil exporter will receive a dollar less than the 50 million euros. The task of the old - free of charge to hedge against falling euro. The solution - buy a three-month put option with a strike price of 1.10 (the right to sell euros for dollars to the bank at the rate of 1.10 in three months) and the sale of a three-month call option with a strike price of 1.2 (obligation to buy dollars for euros at the rate of 1.2, if the rate is higher).
So, the option "cylinder":
- Provides an opportunity to participate in the positive movement of the exchange rate to the price performance of the sold option (ie, before the funding option exercise price);
- In case of adverse movements in exchange rates provides a guaranteed rate hedging (which acts as a hedge option exercise price).
Option "top hat" - a structure with "zero cost", ie purchase option of the variety buyer pays a premium.
Option "cylinder" can be any width financing rates as high as possible (the choice of funder option exercise price) by changing the course of hedging (ie the exercise price hedge option).
Barrier options
Another possibility to reduce the cost of simple call and put options to hedge the organization are called Barrier options Knock Knock in and out. Barrier options - a traditional option, which "appear" (NOC-ins) or "disappear" (Knock Out) if the current rate respect the agreed rate (the barrier, or trigger). When a trigger current American-style course has to touch the trigger once at any time during the life of the option. Consider the use of option Knock out the example of textile companies, which need to hedge the payment of 5 million euros over three months from the growth of the euro / dollar. The classic hedge of the payment options includes the purchase by call option dollar / euro with an exercise price of $ 1.2 for 1 euro (recall that the fiscal policy of the company, above which there are unanticipated exchange losses). Terms and conditions of such option will be approximately as follows: the exercise price - $ 1.2, the amount - 5 million euros, term - three months, the trigger level - 1.25. This means that if the rate will rise above $ 1.25, the option disappears, and the company remains a one on one with its own currency risk. But if the rate will remain in the corridor of 1.2-1.25, the bank will put the euro against the dollar at the rate of 1.2.
Alex Viazovsky
No comments:
Post a Comment