Hedging Opportunities the new generation Foreign Exchange

Hedging Opportunities the new generation

Foreign Exchange Exposure • A corporate that engages in any business activity in a currency other than its own local currency, has a foreign exchange exposure.

Possible FX Exposure Types • Every corporation has a foreign exchange exposure. This includes – Importers – Exporters – Companies that have taken a foreign loan – Multinational companies that need to pay their employees salaries and taxes in different currencies.

Possible Hedging Tools • • • Forward Deal Buy Vanilla Option Vanilla strategy (e. g. Risk Reversal) Buy a Knock Out Option Exotic Strategies

Comparing Forwards and Options • Forwards: – Underlying exposure is offset by engaging in a Forward deal – Obligation to exchange funds on maturity date – No future potential of additional gains from market fluctuations

Comparing Forwards and Options • Options – No obligation to exchange the underlying asset on maturity date (for the buyer) – Vast possibilities of tailoring unique solutions according to specific needs (OTC) – Opportunity to highly leverage one’s position

Illustration • A European corporate is selling goods to a corporate in Great Britain. • The corporate will receive 10 Million GBP in 9 months’ time

Illustration • Analysis: – Receivables in GBP, cost base in EUR – The European company needs to convert these GBP into EUR – The European company will lose money if GBP/EUR rate depreciates

Illustration • Hedging possibilities: Ø Forward Deal- Sell 10 Million GBP against EUR settling in 9 months at a fixed rate Ø Buy a Put GBP Call EUR Option Ø Enter into a Vanilla Strategy (Typically a Risk Reversal) Ø Exotic Option Strategies

Forward • Sell 10 Million GBP against EUR at a strike of 1. 49, on the 27 of June 2006

Buy Vanilla EUR Put

Buy Vanilla GBP Put (ATM) • A European company will profit if GBP/EUR trades above the Forward Rate @ expiry • Full protection from Strike price downwards

Risk Reversal

Risk Reversal • A European company will profit if GBP/EUR trades above the Forward Rate and below 1. 4880 (the SP of the sold Call GBP option @ expiry) • Full protection from Strike price of the Put Euro option downwards • No initial hedging costs (“Zero Cost”)

Buy 1. 4880 GBP Put with 1. 4913 KO

Buy 1. 4890 Euro Put with 1. 49 KO • A European company will profit if GBP/EUR trades above the Forward Rate @ expiry • Full protection from Strike price downwards • Smaller hedging cost on inception date

Regulations & Accounting Standards • Increasing regulations (FAS 133, IAS 39) require special attention by CFO’s and Treasurers to possible Fx exposure

Exotic options strategies for corporates – why? • Enables a hedger to decrease hedging costs • A highly customizable hedging solution • Provides the opportunity to create mixed strategies (Vanilla & Exotic – e. g. buy a vanilla, sell an exotic)

Exotic options hedging strategies • • • Forward Extra Window European Knock In Step Premium Improver

Critical Hedging Tools • • • Historical Data Volatility Surface Risk Management Tools Reporting Mark to market facility

Summary – Using SD-FX • FX options can enable hedgers to profit from market fluctuations, customize tailor made solutions, while being completely hedged • SD-FX allows you to price these options accurately and to abide by the accounting regulations • For more details please contact: Irene Zaslavsky Tel: +44(0)20 7724 4167 i. zaslavsky@superderivatives. com