Instruments Used for Hedging Exchange Rate Risks in the Forex Market, Based on the Practices of Hsbc Brazil
Instruments used for hedging exchange rate risks in the forex market, based on the practices of HSBC Brazil
Final Paper
International Financial Management
Since Multinational Corporation’s performance is affected by exchange rate fluctuations the assessment of their vulnerability relating to unexpected developments in the foreign exchange market is one of the biggest challenges for risk management. Due to the prevailing volatility of financial markets, finding mechanisms to hedge companies against exchange rate risks when trying to achieve excess return becomes increasingly crucial. The basic idea of hedging strategies is to compensate potential losses that may be incurred by an investment by assuming a position in a contrary or opposing market or investment. The value of the loss of one position is offset by the appreciation of the opposite position (= variation negatively correlated single positions).
The decision process of the financial manager to choose which strategy suits the best to carry out hedging involves developing a financial plan for the company. However, the knowledge about financial products offered by the banking sector and the assessment of the extent of security required, according to the given expectations are just as important for rational decision making. Given these facts, contemporary financial institutions are constantly developing new financial instruments to fulfill the needs of firms concerning planning and security. Mitigating financial risks allows companies to focus on the management of organization 's operational risk and core business.
Since foreign trade relations between Brazil and China are constantly growing[1], the purpose of this paper is to introduce some of the main instruments used to hedge exchange rate fluctuation risks based on existing practices of HSBC Brazil.
With their global headquarters in London, HSBC is the second largest global banking and financial services institution. Its network consist of 7,500
Final Paper
International Financial Management
Since Multinational Corporation’s performance is affected by exchange rate fluctuations the assessment of their vulnerability relating to unexpected developments in the foreign exchange market is one of the biggest challenges for risk management. Due to the prevailing volatility of financial markets, finding mechanisms to hedge companies against exchange rate risks when trying to achieve excess return becomes increasingly crucial. The basic idea of hedging strategies is to compensate potential losses that may be incurred by an investment by assuming a position in a contrary or opposing market or investment. The value of the loss of one position is offset by the appreciation of the opposite position (= variation negatively correlated single positions).
The decision process of the financial manager to choose which strategy suits the best to carry out hedging involves developing a financial plan for the company. However, the knowledge about financial products offered by the banking sector and the assessment of the extent of security required, according to the given expectations are just as important for rational decision making. Given these facts, contemporary financial institutions are constantly developing new financial instruments to fulfill the needs of firms concerning planning and security. Mitigating financial risks allows companies to focus on the management of organization 's operational risk and core business.
Since foreign trade relations between Brazil and China are constantly growing[1], the purpose of this paper is to introduce some of the main instruments used to hedge exchange rate fluctuation risks based on existing practices of HSBC Brazil.
With their global headquarters in London, HSBC is the second largest global banking and financial services institution. Its network consist of 7,500
References: [5] Rubinstein, Mark (1999). Rubinstein on derivatives. [6] Lozardo, Ernesto