Risk Management Essay

813 Words Dec 15th, 2010 4 Pages
Giddy | Hedging

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Hedging Techniques

Dr. Ian Giddy New York University

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

Copyright ©2009 Ian H Giddy

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What Hedging Instruments?
What Protection Needed? Volatility & Direction

Direction

Complex risks Or arbitrage Exotics, Hybrids, structured notes

OTC options, Caps and Floors

Forwards, Futures, Swaps

Copyright ©2009 Ian H Giddy

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Tools for Hedging Petrobras has to pay for equipment from Japan, in Japanese yen, in 3 months
Borrow and pay now? Use a forward contract/FX swap?
…show more content…
Copyright ©2009 Ian H Giddy

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Futures – Like Forwards, But Traded on an Exchange

Source: quotes.ino.com
Copyright ©2009 Ian H Giddy

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A Currency Swap: Used to Hedge Debt
IDR 100,000

Indosat Indosat
USD 10 USD 10

BANK BANK

Indosat issues dollar debt, but wants rupiah financing so exchanges its dollars for IDR equivalent at today’s spot exchange rate

Copyright ©2009 Ian H Giddy

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Periodic Exchange of Interest
IDR 100,000

Indosat Indosat
USD 10 Fixed IDR 12%

BANK BANK

Indosat Indosat
Floating USD 3-mo Libor

BANK BANK

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Three Parts of a Currency Swap
IDR 100,000

Indosat Indosat
USD 10 Fixed IDR 12%

BANK BANK

Indosat Indosat
Floating USD Libor IDR 100,000

BANK BANK

Indosat Indosat
USD 10
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BANK BANK
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Interest Rate Swap

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Swap Quotations

Source: ft.com
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Managing Exchange Risk: Tools & Techniques

Borrowing Lending Symmetrical contracts Forward contracts Futures Kinky contracts OTC options Exchange-traded options Exotics
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Swaps
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Spot, Forwards and Swaps in

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