Let's talk about, how business can introduce exchange instruments into practice. Hedging is a particularly relevant topic for those, who works in the field of foreign economic activity: business owners, top managers, heads of departments and chief accountants.
Let's start with a comparison: when we buy a car, then we take out insurance for it and are sure, that in certain situations the insurance company compensates for the damage - at its own expense.
We know, that negative events can unexpectedly occur in business and in the economy. For example, they can push the dollar or other currency up, as happened in 2014 and c 2020 yy. Companies were particularly affected at the time., who carried out settlements with partners in foreign currency. They weren't immune to risks, although such events can be tried to anticipate, take out "insurance" and not pay losses out of pocket.
There is a tool for this - currency hedging (or insurance) risks. In this case, the currency can be any: Dollars, euros, Yuan.
Let's figure it out, how it works, on an example.
Introduce, that Company N buys equipment from the U.S. on 200 000$. Makes an advance - 100 000$, at a comfortable current rate - 72,1 RUB / USD * Through 3 months will need to be deposited more 100 000$. But during this time the rate can grow significantly. The question arises: how to insure (hedged) from the possible growth of the exchange rate?
Company executives used a broker service, which provides the opportunity to make unsecured transactions on the exchange **.
1. To buy currency, they did not withdraw the entire amount from circulation, but only contributed a portion of the funds (12,5%) to a brokerage account - 901 250 rub.
2. They made an unsecured deal to buy the required amount in foreign currency - 100 000$ by the amount 6 308 750 rub.
3. Through 3 month the company has credited funds to the brokerage account: 6 308 750 + 159 015 (this is the fee for the SWAP transaction for the transfer of positions - at the rate 10% annual *** for 3 months) = 6 467 765 rub. Then the currency was transferred to the company bank account. The currency conversion fee was 0,1% at the "Investor" tariff.
4. The rate, taking into account the cost of hedging, will be 73,69 RUB/USD. - according to it, the company will pay for the equipment, no matter, what rate will be on the exchange.
This example is as simplified as possible - for those, who are just starting their way on the stock exchange and are not quite familiar with the terms. More experienced investor, maybe, Guessed, what are we talking about currency swaps. This is the kind of deals, at which you can buy currency, for example, Dollars, not having on hand the entire sum of money in rubles. But at the same time, there is an obligation to transfer the missing rubles by the time the dollars are withdrawn from the brokerage account. (every other day, week, month or any other date, which is convenient for you). To make a SWAP transaction, you need to buy currency in excess of the ruble balance on the brokerage account. This is called "open a position". Until, until you transfer the missing amount in rubles to your brokerage account, your position on the exchange is considered open. And every new day, while the position is open, called "position transfer". A commission is charged for the transfer of a position - it is also a fee for a SWAP transaction.
What are the benefits of this deal for company N?
• Saving money - in case of currency growth for 3 months, the cost of purchasing it will increase significantly.
• Customer loyalty- competitors, due to the jump in currencies, often raise prices for products, and company N can afford to keep prices almost at pre-crisis levels.
• Competent distribution of funds - the company spends on fixing the rate only 12,5% of the purchase amount of currency. The rest of the company funds within 3 months uses in business.
As you can see, the pros of the transaction cover the costs of hedging, therefore, in developed countries, hedging is an integral part of the financial policy of companies.
If you want to hedge against currency risks, but you don't know, what to do in your situation, then leave a request and get a free consultation on your problem.
