A comparative study of strategies suitable for hedging the foreign exchange rate risk of a big company

Abstract

As a result of the internationalization of the economy, foreign exchange transactions and, in this context, risks related to changes in foreign exchange rates appear in the lives of more and more businesses. Ignoring these risks or managing them inappropriately can also impair the company’s ability to generate income, and even cause serious - in some cases unsolvable - liquidity disturbances. In our study, starting from the example of a large domestic company, we examined different strategies for hedging foreign exchange exposure. Due to length limits, we did not have the opportunity to present all possible strategies, but in relation to the hedging strategies we examined, we tried to reveal their possible advantages, dangers, and cost implications. We did all this in order to find the optimal hedging strategy/strategies for the company. During our investigation, we requested offers from 6 financial institutions. The level of the exchange rate to be protected was set at EUR/HUF 410.00. We found that, in the current market conditions, out of the four transactions we examined, three transactions (the forward, the zero-cost collar strategy and the participating forward) can be supported from the company’s point of view.