Forum Archive Index - June 2002

["Gordon King" <gordon.k@xtra.co.nz>]

Don't forget that you are also in the physical market.  What you lose
(or gain) on the hedge you'll even out in the physical market.

Company hedging isn't about speculation, its about securing a known
currency rate for a future transaction.

Gordon

-----Original Message-----
From: sharechat-owner@sharechat.co.nz
[mailto:sharechat-owner@sharechat.co.nz] On Behalf Of
tennyson@caverock.net.nz
Sent: Wednesday, 5 June 2002 12:20 a.m.
To: sharechat@sharechat.co.nz
Subject: Re: [sharechat] NZ Companies and Hedging


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



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