You Have Options

Demetri Papacostas and Francesco Tonin

The previous chapter examined some of the theoretical and practical considerations to hedging. Regardless of the approach you choose, there comes a time to execute. This chapter will examine the decisions and instruments available when the rubber meets the road. Some instruments should be familiar from previous chapters – we will review those quickly, but focus more on new elements that would apply to corporate behaviour. We will take it up a notch and talk about nuanced considerations when hedging forward, discuss the difference between forwards and cross-currency swaps, and move into greater complexity when looking at forward-like strategies. Specifically, we will consider no hedging, hedging organically, hedging with forwards, options and then all kinds of forward-like alternatives that stretch the use of options.

HEDGING STRUCTURES FOR CORPORATE HEDGERS

Forwards

The workhorse for FX hedging by most companies is the forward contract, just as the cross-currency swap is for asset managers. Both instruments do the same thing, more or less. We have seen that a steady stream of revenues from abroad is often disrupted and complicated by the vagaries of the exchange rate. What