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Part 1. Solution of the problem Given a large Russian importer of electrical equipment is payable under the contracts with European suppliers in euros. Management reporting company is in dollars, and when the euro rising against the U.S. dollar, the formation of exchange rate losses. Depending on market conditions in the euro monthly payments of $ 10.5 million loss on exchange last year, fueled by growth in the euro against the dollar by 23%, amounted to approximately $ 5 million Importer operates under the commercial credit - deferred payment upon delivery of goods is 1-3 months.

Required to optimize the exchange rate losses so that the amount was either minimize or known in advance at the beginning of the fiscal year for the whole period.

What future course of preparing for us

Companies faced with large exchange losses over a year ago (in June 2002 began a sharp drop in the dollar to the euro). There were several ways to solve this problem within the business enterprise.

First, a strategy of compensation, which assumed an adjustment of ruble prices for equipment to be purchased for euro, in line with the growth rate eurodollar. However, this simple approach proved to be ineffective - the price of the company's products have a high degree of elasticity. In other words, rising prices, the company teryala market share and hence profits. Another option is the solution - change the currency of payment under the contracts with European suppliers to the euro for dollars. However, suppliers have refused to accept payment in dollars, for fear of exchange losses. The only thing that could - limit the share of payments in euros in total share of foreign currency payments. So, having tried all the available non-financial ways, the company decided to seek to hedge currency risk financial instruments. The first thing that occurred to financiers - have to balance the company's liabilities in euro assets, too, in euros. But payable in euros from a Russian importer can not be balanced by accounts receivable in the euro, as all sales to customers are in rubles.

Maybe then worth buying assets denominated in euros - a bill or bond then exchange losses on euro payments will be offset by an increase in market value of securities. But this option required the diversion of funds in the amount of future payments in euros. Unfortunately, an importer could not afford to hold the securities for $ 10.6 million addition, investments in securities involve risk and low returns.

And finally, it was clear that the assets in euros to cover losses only a short time (month, two, three), and by the end, the company still will exchange losses (cumulatively). Possible option - early in the year immediately buy assets in euros for the full amount of payments for the upcoming year, but it is a huge amount. Another option - take the bank and keep on deposit with a loan denominated in euros. The loan (say a ruble) to buy Eurobonds, which are then easily lay in the provision of the loan.

Unfortunately, with a loan scheme has several drawbacks excessive lending affects capital structure (ie, makes the company less attractive to investors), and also takes time to pass a credit committee at the bank. Therefore, the leadership soon began to seriously consider options for hedging through currency forwards, derivatives, options, futures and swaps.

Derivatives market

As is known, the secondary market for financial instruments (namely the so stands the term "derivatives") ended up in Russia after the 1998 crisis, in fact, has not begun. After the sharp depreciation of the ruble, many Russian banks were forced to abandon their commitments to supply dollars on forward contracts dollarrubl they concluded prior to the crisis. Moreover, domestic courts have recognized forwards transactions "bet", ie not subject to judicial protection. Thus, the legitimacy of such operations was staged in Russia in serious doubt. There was no way. Schemes were developed hedging with derivatives, began negotiations with the banks. Mostly it was the western banks, because Russia did not offer similar products - part by post-emergency concerns, partly because of the absence in the country market for these instruments, and hence can not override their risks by their commitments.

So, forward.

Forward - a futures transaction in which the buyer and seller agree on the delivery of the underlying asset (in our case - the euro against the dollar or rubles) on a specified future date, while the base price is set at the time of closing. Forwards - is always the OTC product. In practice, it looks like. The company makes a deal with the bank for the supply of euros for dollars, say, a month later. Directly negotiated rate - say, $ 1.1 per euro. If a month's course is $ 02.01 per euro, the company will save 10 cents on every dollar. With $ 1 million in savings of $ 100 thousand If the rate drops to parity (11), the loss company would be the same a $ 100 thousand and avoid these losses (in the case of depreciation), not forward - this commitment (so-called problem can be solved structured forward and options - but this is a topic for the next item). In addition, the striker has two unpleasant properties. First is the need to pass the credit committee at the bank, which sells forward (the bank is required to assess the credit risk of the buyer). Secondly, the forwards have a negative impact on the company's liquidity. Say, the situation has changed, and delivery of the euro was not needed (eg, payment in Euro to the supplier, under which was bought forward, has been canceled or postponed to a later date). What to do then do nothing, the company must deliver the dollars and euros to get unnecessary. In short, the forward was highly inconvenient product, even though forwards are mostly in the derivatives market.

Futures - this is also an urgent transaction. Futures differ from the forward that this exchange the product, and hence the conditions (time, amount) are standardized. In addition, the buyer makes a payment center exchange margin, as well as adverse movements in exchange rate (in the case described - the growth of the dollar against the euro) variation margin, which guarantees the fulfillment of obligations bought futures to the seller. If the dollar depreciates, then the variation margin is already making a seller.

Claims to futures were the same as for the forward - the possibility of unlimited losses (however, futures, unlike forwards traded on the exchange every day and could theoretically be sold before the date of execution - that in reality it is unlikely because it requires active speculation, placement of stop-loss, etc.), as well as the need to divert funds to make margin, and generally underdeveloped market futures exchange in Russia. Futures on currencies traded on just two floors - the MICEX and the SPCE.

Liquidity of the market (in fact, trade - the number of daily transactions and applications for pokupkuprodazhu futures) of these exchanges is in its infancy. Currency swaps - the kind of financial transactions in which the buyer (seller) of currency at the time of purchase (sale) is committed to a certain period of time to sell (buy) the same currency. Swap market in Russia there is little, except for interbank swaps. Structured as derivatives, such as Zero-cost Collar, Convertible-Forward, etc., because of their complexity and exoticism to be considered separately.

Output found

Currency call option dollarevro with calculations in rubles! That product was offered the company one of the multinational banks. Type option - deliverable, ie, involving the supply of euro against the dollar. Instead of U.S. Dollars can be delivered (at the current exchange rate). What is the convenience of such a scheme for the company The first option - a right, not an obligation. That is the situation changes with the liquidity of the option can be discarded. Second, the Bank has offered to acquire options on any amount and timing. Third, the Option may not be of unlimited losses, because the responsibility of the buyer is only paying the original premium (option price), which is about 1.5% of the amount in a month at current exchange rates (so called at the money). Options for longer periods, for two months and more, are more expensive. Paid a premium, according to a new tax code, can be attributed to the cost - in the event that it was hedging, not speculation, it is easy to prove that the provision of the contract with the supplier to the euro, which was purchased under the option. Deliverable scheme with options can be easily modified into a scheme with non deliverable options, where there is no movement of currencies, but only the arbitration. Call option buyer receives the difference between the strike price (contractual rate) and spot (current rate) in the event that spot above the strike price. However, according to the Tax Code non deliverable option, be sure to stock the product, but it is easy to manage, if you make a deal, which actually lies between the customer and the bank, the stock market. The only negative option - this product is worth more than the forward or futures contracts, which, however, it is clear the right is always more expensive commitments.

Thus, the solution was found, and the company in the new year is regularly hedge their foreign exchange exposure, which helps her to avoid exchange losses. Moreover, hedging is happening in Russia rather than in a foreign offshore, which is an advantage and competitive advantage.

Part 2. Complex strategies

In a previous publication of the Sun "talked about simple ways to hedge the currency risk of the importing company - forwards, futures and options. In the second part we are talking about complex strategies that use derivatives structured.

Structures with a "zero-cost»

Home unpleasant feature a simple call option (Fig. 1), which makes it difficult to use for the purpose of hedging - the high cost. Thus, a simple monthly call option U.S. dollar / euro at the money (ie, when the exercise price at the date of acquisition is taken to be the current spot) the average cost of 1% to 2% of the hedged amount.

Longer options are even more expensive. If companies need to regularly hedge their currency risks, the costs of option premium can be quite substantial. Realizing this, major international banks have gone to meet clients and to offer so-called structure with "zero-cost».

One of these structures is the option "cylinder" (Fig. 2).

essence of the scheme - the buyer wants to hedge themselves against the growth of, say, the euro against the dollar, but do not want to pay a large premium on a simple call option. Then, the bank offers to sell the call option for free, if this company while the bank will sell a put option (the so-called financing options).