Forum Archive Index - December 2001

["Jeremy" <jeremy@electrosilk.net>]

> Zero sum, zero risk.
> cheers
> jesse

You can do some zero risk hedging and actually make some money as well.  Say
you are contracted buy $100 million yen worth of tractor parts from Japan in
6 months time.  You can either hope the rate stays the same or you can
borrow the full amount now in Yen and pay interest on it (at very low
Japanese rates).

To cover your costs, you put the equivalent kiwi into the short term money
market and make lots of cash that will more than cover the cost of your
Japanese interest.  In six months time you redeem the Japanese loan and pay
for the tractor parts in Japan.  In NZ, you release your cash from the money
market and use some of it to pay the Japanese interest.  Net risk is
exchange rate variations against the interest, not the capital, so you cut
your risk to a very small percentage of what it could be.  A big plus is
zero exchange rate losses.

Even cheaper options include debt swaps (equivalent to forward contracts)
where you the tractor importer and a Japanese tuna importer agree to use
today's exchange rate to set an exchange in 6 months time.  On the due date,
the Japanese fellow deposits funds against your bill and you deposit funds
against his.  Again, this type of deal totally removes exchange rate losses.

Jeremy



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