Cyclicality of Currencies and Use of Options to Manage Credit Utilisation

Stanley Myint and Fabrice Famery

Contents

Foreword

Introduction

1.

Theory and Practice of Corporate Risk Management

2.

Theory and Practice of Optimal Capital Structure

3.

Introduction to Funding and Capital Structure

4.

How to Obtain a Credit Rating

5.

Refinancing Risk and Optimal Debt Maturity

6.

Optimal Cash Position

7.

Optimal Leverage

8.

Introduction to Interest Rate and Inflation Risks

9.

How to Develop an Interest Rate Risk Management Policy

10.

How to Improve Your Fixed-Floating Mix and Duration

11.

Interest Rates: The Most Efficient Hedging Product

12.

Do You Need Inflation-linked Debt?

13.

Prehedging Interest Rate Risk

14.

Pension Fund Asset and Liability Management

15.

Introduction to Currency Risk

16.

How to Develop Currency Risk Management Policy

17.

Translation or Transaction: Netting Currency Risks

18.

Early Warning Signals

19.

How to Hedge High Carry Currencies

20.

Currency Risk on Covenants

21.

Optimal Currency Composition of Debt 1: Protect Book Value

22.

Optimal Currency Composition of Debt 2: Protect Leverage

23.

Cyclicality of Currencies and Use of Options to Manage Credit Utilisation

24.

Managing the Depegging Risk

25.

Currency Risk in Luxury Goods

26.

Introduction to Credit Risk

27.

Counterparty Risk Methodology

28.

Counterparty Risk Protection

29.

Optimal Deposit Composition

30.

Prehedging Credit Risk

31.

xVA Optimisation

32.

Introduction to M&A-related Risks

33.

Risk Management for M&A

34.

Deal-contingent Hedging

35.

Introduction to Commodity Risk

36.

Managing Commodity-linked Revenues and Currency Risk

37.

Managing Commodity-linked Costs and Currency Risk

38.

Commodity Input and Resulting Currency Risk

39.

Offsetting Carbon Emissions

40.

Introduction to Equity Risk

41.

Hedging Dilution Risk

42.

Hedging Deferred Compensation

43.

Stake-building

We have already referred to the difference between the static and dynamic risk management in Chapter 16. In this chapter, we shall see another application of the dynamic policy. We will examine three key topics:

    • the cyclicality of the EURUSD exchange rate;

    • how companies with long-dated EURUSD exposure can use the cyclicality to develop a dynamic hedging strategy; and

    • how companies can use FX options instead of forwards to reduce the utilisation of credit lines.

Some companies have long-dated predictable foreign cashflows due to the nature of their business. For example, in the construction and airspace sectors, multi-year contracts in a foreign currency are common. Normally, contracts are signed in USD while a significant part of operating costs is in EUR, GBP or another currency. For these companies, currency risk management is a strategic issue, since their pricing is often compared against that of their USD competitors with a large part of USD costs. If the EUR exporter does not manage the currency risk carefully, it may not be able to offer a competitive price, or will remain exposed to the currency risk on its profit margins.

When their

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