Giddy Forwards, Futures and Money-Market Hedging/1 Forwards, Futures and Money Market Hedging Prof. Ian Giddy New York University Hedging Transactions Exposure Types of exposure l One-shot exposure l Hedging approaches: l u Open u Forward u Money market u Futures u Options l Ongoing transactions exposure Forwards, Futures and Money-Market Hedging 7 Copyright ©1997 Ian H. Giddy Giddy Forwards, Futures and Money-Market Hedging/2 Tools for Hedging l Petrobras has to pay for equipment from Japan, in Japanese yen, in 3 months u Borrow and pay now? u Use a forward contract/FX swap? u Pay later at spot? Copyright ©1997 Ian H. Giddy Forwards, Futures and Money-Market Hedging 8 Forward Contracts, Futures and Money Market Hedging Money market hedging: match currency of assets and liabilities l Forwards: OTC agreement to exchange currencies at certain exchange rate in the future l FX swap: simultaneous spot sale and forward purchase of a currency l Futures: Exchange-traded contracts for notional future delivery, minimizing default risk via marking-to-market l Copyright ©1997 Ian H. Giddy Forwards, Futures and Money-Market Hedging 9 Giddy Forwards, Futures and Money-Market Hedging/3 Forward Contracts Agreement to exchange currencies at certain exchange rate in the future l Default risk in forward contracts arises because such a contract is a commitment for future performance, and one or other party may be unwilling or unable to honor that commitment. l On the settlement date, one party in effect owes the other party a net amount. l Copyright ©1997 Ian H. Giddy Forwards, Futures and Money-Market Hedging 10 A Typical Forward Contract l We agree today to pay a certain price for a currency in the future Soles Backus Backus SANSANTANDER TANDER Copyright ©1997 Ian H. Giddy Forwards, Futures and
