Abstract
<p>Effective currency risk management using various derivatives is particularly important under increased market volatility. The risk is relatively higher for longer than shorter time frames. This study highlights the implementation of selected instruments for long-term hedging. It presents the application of cross-currency interest rate swap as a currency risk hedging tool used by Polish exporters, mainly manufacturers generating their revenues mostly abroad (in euro area), exposed to negative exchange rate fluctuations. The paper covers issues related to the pricing, market risk estimation and collateral required in the OTC market, as well as undertakes a sensitivity analysis in search for exchange rates at which margin call occurs. There is a comparative analysis and back test simulation conducted using market data from exchange and money markets. The study emphasized that the analyzed instrument meets the expectations in terms of hedging the company cash flows, as well as may generate additional benefits due to the still existing interest rate differential.</p>
Highlights
There are various instruments available for non-financial companies to manage their currency risk exposure in over-the-counter market in Poland
S The main aim of the article is to present the application of currency interest rate swap (CIRS) transaction as a currency risk hedging tool used by Polish exporters, mainly manufacturers generating their revenues mostly abroad, exposed to negative exchange rate fluctuations
The transaction is concluded on the following terms:3 a) Cash flows to be paid by the company: – Currency: EUR C – Starting notional: 6.0 million – Interest rate: 0% fixed – Basis: 30/360 – Payment frequency: monthly b) Cash flows to be paid by a bank: – Currency: PLN – Starting notional: 27.039 million M – Interest rate : 0% fixed – Basis: ACT/ACT 365-ISDA – Payment frequency: monthly Rate of exchange: 4.5065; U Trade date: 23 April 2019 Start date: 25 April 2019 End date: 30 April 2024 In order to open any position in the OTC derivatives, a collateral is required to cover pre-settlement risk
Summary
One of them worth considering especially in long-term hedging is cross-currency interest rate swap (CIRS). In general sense the CIRS is an agreement between two parties to exchange stream of payments in one currency for a stream of cash flows in another. It is mainly associated with changing both the interest and exchange rates mostly for investment loans. It can be quite adopted as an alternative to forward and option contracts especially in dealing with long-term exposures. The additional goal is to recognize whether the current pricing of long
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