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From: | "tennyson@caverock.net.nz" <tennyson@caverock.net.nz> |
Date: | Tue, 4 Jun 2002 12:19:45 +0000 |
Hi trader 100, > > >I take your point about the 'risk' of a hedge being out of the >money. Although from a finance point of view I believe that the >correct way to look at a forward contract is to say that it has >removed the risk but, as with any decision, there is an opportunity >cost. > > Interestingly enough, I happened to hear financial commentator Murray Weatherstone's interview on National radio this morning where he was discussing exactly this topic. The bit I hadn't appreciated before was that the rate set in a hedge contract is not a prediction of where the exchange rate will go. It is just a balancing out of the interest rate risk, as you have explained to us 'trader 100'. Weatherston also said that often the bank drawing up the exchange rate hedge asks for a 'deposit' on the future transaction, sometimes as high as 20% of the capital to be spent in one years time! This seems outrageous. It still seems odd to me that a New Zealand company would seek to mitigate their exchange rate risk by taking out a 'policy' which makes no pretence at guessing where the exchange rate is going! Because of this, I find it hard to come to terms with the idea that the New Zealand company is 'out of the money' if the exchange rate 'goes the other way'. I feel 'out in left field' would be a more apt description of such an event. I guess the main niggle I still have is that as an importer you want to make sure the $NZ doesn't go below a certain price. As an exporter you want to make sure the $NZ doesn't go above a certain price. Hedging is not really a protection against this, because it is not guaranteed that the hedging price you will be offered will meet these goals. I wonder at the opportunity cost of taking out a 'policy' that doesn't really cover the event you are trying to insure against. Hedging seems to be a take it or leave it bet. I was under the impression that *if* the exchange rate you were offered as a hedge did not meet your goal, then you would at least have the option of paying a higher premium so that it would. Granted the higher premium might have been so high as to make the transaction marginal for you. Nevertheless I was under the impression you had that choice, yet it seems very clear from what you are saying 'trader 100' that as a exporter/importer, you don't. SNOOPY --------------------------------- Message sent by Snoopy e-mail tennyson@caverock.net.nz on Pegasus Mail version 2.55 ---------------------------------- "You can tell me I'm wrong twice, but that still only makes me wrong once." ---------------------------------------------------------------------------- To remove yourself from this list, please use the form at http://www.sharechat.co.nz/chat/forum/
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