Hedging method

Option transactions differ from forward transactions that a bank retains the right to choose which increases the efficiency of operations. With an option you can perform the following operations: the purchase of an option to buy, sell an option to purchase, a purchase option on the market, selling an option to sell. Options used to hedge put a short currency position, if the rate tends to increase, for resale for profit. Sall options are used: for hedging long currency position, if the exchange rate tends to decrease, in order to hedge anticipated foreign currency revenues and selling currencies. The advantage of using the option is that the owner can avoid losses from the sharp changes in exchange rates, pre-fixing to a level of exchange rates. If the sudden change does not happen, the owner of the option may refuse to follow it, and its maximum cost would be an amount equal to premiums paid for the purchase of the option. Wide range of financial derivatives in international markets allows banks to find the most effective combination of the use of foreign currency transactions and use sophisticated methods of managing currency positions in order to reduce currency risk. For domestic banks the possibility to implement the urgent foreign exchange transactions in the domestic market is impossible, but in the international markets rather limited. As the analysis of management of currency positions, the world practice there are many ways to hedge currency risk. Depending on the conditions in which actors operate foreign exchange market, and strategies for their behavior might use a different set of management areas considered foreign currency position. Domestic banks, for objective reasons can not be a model user of the spectrum of methods, in particular, a synthetic currency position control. Under such circumstances, banks typically use a strategy of risk uncovered within the prescribed limits by the National Bank. Category: Management Operations Commercial Bank | Tags: Hedge