The euro weakened sharply against the dollar this week. Great time to explore FX hedging alternatives!

The starting point for any hedging transaction is the forward rate. The forward transaction is the most straightforward hedging alternative. Although this hedging instrument may not suit every company, it serves as a reference point when we hedge using any other hedging strategy. 

June 17, 2021

EUR/USD Forward curve as of June 17, 2021 

Forward table: 

Risk reversal hedging strategy

• Exposure direction: EUR appreciation against the dollar

• Spot rate when pricing: 1.1945

Forward rate for a period of about six months at the time of pricing: 1.1991 

The strategy meaning:

• Protected rate: 1.2075. Right to buy euros and sell dollars at this exchange rate.

• Obligation rate: 1.1918. Obligation to buy euros and sell dollars at this exchange rate.

• Expiry: 6 months.

Protection in the other direction...

• Exposure direction: Euro depreciation against the dollar

• Spot rate when pricing: 1.1946

• Forward rate for a period of about six months at the time of pricing: 1.1990 

The strategy meaning:

• Protected rate: 1.1906. Right to sell euros and buy dollars at this exchange rate.

• Obligation rate: 1.2054. Obligation to sell euros and buy dollars at this exchange rate.

• Expiry: 6 months.

• Cost: Zero cost.

Forward extra hedging strategy

• Exposure direction: EUR appreciation against the dollar

• Spot rate when pricing: 1.1947

Forward rate for a period of about six months at the time of pricing: 1.1993 

The strategy meaning:

• Protected rate: 1.2017. Right to buy euros and sell dollars at this exchange rate.

• Obligation rate: 1.2017. Conditional obligation to buy euros and sell dollars at this exchange rate.

  • The Obligation will take effect if, during the strategy life, the exchange rate is traded at least once at the trigger rate of 1.1615.

• Expiry: 6 months.

• Cost: Zero cost.

Protection in the other direction…

• Exposure direction: Euro depreciation against the dollar

• Spot rate when pricing: 1.1951

• Forward rate for a period of about six months at the time of pricing: 1.1996 

The strategy meaning:

• Protected rate: 1.1972. Right to sell euros and buy dollars at this exchange rate.

• Obligation rate: 1.1972. Conditional obligation to sell euros and buy dollars at this exchange rate.

  • The Obligation will take effect if, during the strategy life the exchange rate is traded at least once at the trigger rate of 1.2330.

• Expiry: 6 months.

• Cost: Zero cost.

Plan before you hedge .

Disclaimer:

This post does not constitute advice or recommendation.

Anyone who uses the information presented here does so at his own risk.

‘Calc fellow’ is not a consulting firm and does not provide a liquidity source for derivative transactions.

‘Calc fellow’ provides tools to companies to help them manage their currency risks (Software as a service). We offer a derivative pricing calculator. We also offer policy tracker and FX derivatives inventory management tools.