The ‘Paradox of Risk’ p.1

You’re the CFO of a medium-sized firm, and you want to provide your firm with the best possible strategy to deal with currency risks. You may have dealt with these risks on a smaller scale before. And it’s likely that you took what you thought was a risk averse stance, and thus paid all overseas invoices at the Spot rate. You traded at Spot because you felt that Forward Exchange Contracts and Options were risky and you had heard of companies that had been burnt using them.

However, by choosing to pay all of your invoices at the Spot rate, a little red flag popped up in the back of your mind warned you that this may not truly be the safest strategy…  this is the ‘Paradox of Risk’. 

Allow me to explain…

A Fresh Approach to Currency Hedging (P.3)

Over the last two issues we have covered both a strategy that involves zero hedging (with no protection) and one with complete protection (but no opportunity). We have seen the inherent problems with both. Today we are looking at simple Options, that aim to tackle the problems of each strategy by giving 100% protection while enabling 100% opportunity simultaneously. But before you jump on the phone to call your dealer about this little silver bullet, let’s take a closer look…

A Fresh Approach to Currency Hedging p.2

In our last instalment we discussed the scenario of ‘not hedging’ or ‘zero protection’. Today we are going to look at the flipside of the coin… 100% protection. It sounds attractive already but be sure to remember that 100% certainty does come with its own trade-offs. Let’s take a look.

A Fresh Approach To Currency Hedging

Hedging describes the different ways that Australian importers are able to protect their company against a fall in the exchange rate. There are actually many different ways to provide this type of protection though your FX provider is most likely to offer Forwards as the primary instrument. They may also mention Options or have their own names for option strategies such as ‘Smart Forwards’, ‘Zero-Cost collars’, ‘Rebate Forwards’ or even ‘Plain Vanilla’ options. It’s great to get to know how all of these work (and we will eventually) and where they might, if ever, be applicable to your business.