Forum Archive Index - June 2002

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Gordon,

 
>
>
>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.
> 
>



You purchase a forward exchange contract for next year, so that you 
can use that $USD money to buy goods to put into your retail 
'Warehouse'.   As soon as you do this, the bank will purchase that 
amount of currency today and offer it to you in a years time at an 
adjusted rate to mitigate the interest rate loss or gain over the 
coming 12 months.    

So, far from still being in the physical market, my understanding is 
that as far as the physical purchase of US dollars goes, this means 
you have brought the transaction forward (well the bank has done it 
for you).  By taking out a hedge you have in effect *removed 
yourself* from the physical market in one years time.  If you don't 
agree please point out where I have gone wrong in this reasoning.


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


Yes, but why should a New Zealand company 'know' what the best 
exchange rate for them to have is.   When the time comes should they 
hedge at US45c, US46c or US47c?    Isn't their 'choice', whatever 
they end up getting in the hedge contract, and although once chosen 
fixed, a form of speculation in itself?


SNOOPY



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