Financial Hedging: Methods And Techniques For Managing Currency Risks

Calculating the forward contract hedge value for Pomo Limited

The above table directly indicates the overall option hedge for Pomo Limited, which can eventually help in improving the level of converted payments in SGD/USD. The future sport rate is also detected to understand the level of converted amount that can be used by the organisation to determine the converted price after one year. The options method relevantly uses premiums that can complete the option trade. Therefore, from the option trade the overall converted value will be at the levels of $584,000. Buchardt and Moller (2018) stated that option hedging strategy is mainly used for reducing the risk of currency conversion and take low capital for conducting the relevant hedges. In this context. Gueant and Pu (2017) further mentioned that with the help of money market hedge companies are mainly able to reduce the level of risk involved in currency conversion.

The evaluation of above table directly indicates that the alternative hedging option that can be conducted for Pomo Limited is the forward contract hedge, as it has the lowest level of loss in currency conversion as compared to other forms of hedging contract. From the relevant evaluation of the above table it can be detected that the forward contact hedge will provide the highest level of conversion values of $608,000 after one year, which is not possible in other conversion options. The money market hedge will only provide the conversion value of $603,065.42, while the options market will provide $584,000 after one-year period. Hidalgo, Pigolotti and Munoz (2015) mentioned that with the detection of adequate hedging process companies are mainly able to reduce the losses, which are incurred during the currency conversion and maintaining the level of income that can be generated from investment. The no hedge position of the company will directly raise relevant concerns, as the company will incur abnormal risk from the no hedge conversion method. Liang and Li (2015) argued that forward contract hedge relevantly has higher expenses in comparison to money market hedge and option hedge.

Introduction:

Financial hedging is mainly considered an adequate measure, which can reduce the financial risk of companies. In addition, companies using the financial hedging measure is mainly able to minimise the level risk and maximise the returns from currency conversion.

There is specific advantage of financial hedging measures that can be used by the organisation to generate high level of income from their operations. With the presence of financial hedging organisation are able to reduce the risk from currency market. The financial hedging can be conducted immediately with relevant low cost, which reduces risk of currency exposure of the organisation. Ning and You (2017) mentioned that with the rising risk can be reduced by conducting adequate hedging measure, as it helps in curbing the losses from depreciating currency values.

Calculating the money market hedge for Pomo Limited

The major concern for the hedging process is the over hedge, which can be conducted by companies. The over-hedging process might negatively increase the risk exposure of the organisation, which might hamper their financial position. The over-hedging process only occurs when the company does not conduct adequate research in their currency exposure. The major limitation of the financial hedging is its incapability to hedge against long-term, real exposure with the financial contracts. Moreover, the financial hedging process is relevantly considered costly, time-consuming, and not easily revisable for the organisation. Thus, the organisation will not adequate reduce the total risk from investment if adequate research is not being conducted by the companies (Ning & You, 2017).

Th recommended alternative method that needs to be conducted by the organisation are operational hedging, leading and lagging, cross hedging, and currency diversification. The organisation with the help of cross hedging can adequately reduce the risk level, while reducing the total risk from investment. the use of cross hedging measure might adequately allow the organisation to generate high level of income from investment, while reducing the total risk from investment. The cross-hedging measure might adequately support the risk mitigation of Pomo limited, which can eventually improve the level of currency conversion value.

Conclusion:

From the relevant evaluation it can be detected that other forms of hedging process might directly have negative impact on currency conversion of the company, while cross hedging can help in reducing the conversion loss. There is significant advantages and disadvantages of financial hedging measure, which can help in improving the level of revenues from currency conversion. The disadvantage of the financial hedging process can be reduced with the help of recommended hedging process such as operational hedging, leading and lagging, cross hedging, and currency diversification.

References

Bonetti, D., Leão, D., Ohashi, A., & Siqueira, V. (2015). A general multidimensional Monte Carlo approach for dynamic hedging under stochastic volatility. International Journal of Stochastic Analysis, 2015.

Buchardt, K., & Møller, T. (2018). Hedging and Cash Flows in the Presence of Taxes and Expenses in Life and Pension Insurance. Risks, 6(3), 68.

Guéant, O., & Pu, J. (2017). Option pricing and hedging with execution costs and market impact. Mathematical Finance, 27(3), 803-831.

Hidalgo, J., Pigolotti, S., & Munoz, M. A. (2015). Stochasticity enhances the gaining of bet-hedging strategies in contact-process-like dynamics. Physical Review E, 91(3), 032114.

Hussain, S., Zeb, S., Saleem, M. S., & Rehman, N. (2018). Hedging Error Estimate of the American Put Option Problem in Jump-Diffusion Processes. FILOMAT, 32(8).

Liang, C., & Li, S. (2015). Option pricing and hedging in incomplete market driven by Normal Tempered Stable process with stochastic volatility. Journal of mathematical Analysis and Applications, 423(1), 701-719.

Ning, C., & You, F. (2017). Hedging Against Uncertainty in Process Planning: A Data-Driven Adaptive Nested Robust Optimization Approach. In Computer Aided Chemical Engineering (Vol. 40, pp. 1345-1350). Elsevier.

Ning, C., & You, F. (2017). Hedging Against Uncertainty in Process Planning: A Data-Driven Adaptive Nested Robust Optimization Approach. In Computer Aided Chemical Engineering (Vol. 40, pp. 1345-1350). Elsevier.