Hedgebook Blogs

The purpose of this blog is to examine IFRS 13 as it relates to the Credit Value Adjustment (CVA) of a financial instrument. In the post GFC environment, greater focus has been given to the…

Credit Value Adjustment or CVA has been around for a long time, however, with the introduction of the accounting standard IFRS13, this year there is a requirement to understand it a bit better. The new…

We’re pleased to announce our acquisition of New Zealand-based financial data services company Infoscan. In a move designed to augment the existing Hedgebook offering as well as create new IP, we see the acquisition as a key…

Financial hedging involves buying and selling foreign exchange instruments that are dealt by banks and foreign exchange brokers. There are three common types of instruments used: forward contracts, currency options, and currency swaps.

Managing this FX risk faced by importers and exporters all over the globe today is a three-step process: identify FX risk; develop a strategy; and utilized the proper instruments/strategies to hedge the risk.

Many small- and medium-sized firms engaging in import and/or export activity tend not to hedge. The reasons not to hedge come in all shapes and sizes: it’s too complex; it’s too costly; there’s a misconception that it is speculation; or even that that firms don’t know about hedging tools and strategies available to them.

Importers and exporters alike face foreign exchange risk, or currency risk, when engaging in economic activity outside of their domestic currency. As explained in an earlier blog post, currency risk materializes for exporters when exchange rate volatility results in the company repatriating fewer revenues abroad, when the domestic currency strengthens relative to the foreign currency. For importers, this risk is the exact opposite: currency risk materializes when the domestic currency weakens relative to the foreign currency.

Import and export companies face the daunting task of dealing with foreign exchange risk that can easily alter revenues from overseas; with smaller cash reserves, exchange rate fluctuations can be the difference between profits and losses.

A currency swap locks in a price of a currency pair and is another tool that can be used to manage an organisation’s cash flow. It pays the fixed-price buyer of a currency pair a payout equal to the difference between the current price and the settlement price of the swap.

Movements between currency pairs can be swift and choppy. Using average price currency options can be a significant help in smoothing a corporation’s cash flows.

Learn about one of the most interesting strategies used by investors or treasurers to hedge their exposures to the currency markets: risk reversal.

Learn about one of the easiest and most effective ways to hedge a currency position, by purchasing a protective currency put.