Hedging is carried out through

Forward foreign exchange transactions, currency futures and options, foreign currency swap contracts, swaptions, a combination of type double forwards, currency swaps and others who differ in characteristics and mechanisms of functioning. Forward contracts is probably the most frequently used method of hedging (that's why sometimes under hedges understand only forward operations of currency risk insurance) with a view to avoiding the risks associated with purchasing and selling foreign currency, and provides its delivery in time for more than two days. More likely time frame for this type there is one or three or six months (although, as already noted, the timing of such transactions may be several years). Forward commitments are rigid, ie binding. Terms of the forward contract are as follows: rate is fixed at the time of the agreement, the actual delivery of currencies will occur over a specified period of time, the amount of the contract is not standardized. The disadvantage of the use of forward contracts to hedge the currency risk is the fact that forward contracts are concluded on the interbank market rather than on an exchange. Thus, entering into forward contracts, the bank faces the credit risk. In addition to simple forward transaction (the so-called outright) to this species can be attributed complicated deal - swap. Operations such as swap are to purchase foreign currency on spot conditions, followed by a counter transaction on the terms forward. As a result of such transactions banks buy foreign currency needed for International Settlements, and to diversify its foreign exchange reserves, maintaining foreign exchange positions in private. Using the swap contracts has gained popularity in the early 1980's Today, banks and other subjects of international foreign exchange market are able to use in my practice as a classic swap operations, and their varieties in the form of option, currency and interest rate swaps and t . etc. Category: Management Operations Commercial Bank | Tags: Hedge