Finance: Future Hedge - Essay Example

Forward Hedge:
Although the future and forward hedging through future and forward contracts respectively are almost similar in nature yet there is one main difference between the two. Forward Contracts are made for fairly large transactions whereas future contracts are reached for smaller amounts. Large organizations such as multinational or supranational companies, large financial or investor groups may involve themselves in forwarding contract hedges.

Money Market Hedge:
Monet market Hedge is an internal hedging technique that refers to “borrowing and lending transactions to eradicate currency risk by locking the particular variables related to foreign exchange and cash equivalents.” (Kofi Bofah)

The investors or organizations can hedge the payables or receivables at any particular time in the future.

Currency Option Hedge:
Currency Option is another instrument utilized by investors or corporations to hedge against negative fluctuations, volatility, or movements in foreign exchange rates. In simple words, I can say that a Currency Option is an agreement through which the holder f currency has the ‘right to involve in buying or selling of currency at a specified time period.’

For instance, in our case, Hybat Corporation can hedge against foreign currency risk by purchasing a currency option put or call. If it believes that the USD/HUF rate is going to fall from 250 to 200 meaning that it will become more expensive for US Hybat to convert its export revenues from HUF to Dollar and send it to its parent company so Hybat would want to buy a ‘put option’. Similarly, if the rate is going to increase from 181 to 200, then Hybat would want to buy a “call option on USD/HUF so that it could stand to gain from an increase in the exchange rate” (or the USD rise). (Investopedia.com)

You must independently justify the credit rating for each category given. That is, if you use these categories, they must be concluded not a starting point, you will be judged on your independent analysis and conclusions, not your ability to simply reproduce the views wire ratings.

Answer 2:
Trading-safely.com has given an “A4” country rating to Hungary. This rating can be justified keeping in view the macro-economic indicators of Hungary that show that inflation was 3%, economic growth was negative 6% i-e a reasonable contraction, Public Sector Balance was -2.9%, trade surplus was 4$ billion, etc in 2009. however, in the first quarter of 2010, the economic contraction lowered to just -1% which shows the sharp economic recovery and improving business outlook in Hungary.

Undoubtedly, Hungary has received an “A2” business climate rating because of the fact that Investors can find reliable corporate financial information and institutions usually perform efficiently; therefore, it can be justified to say Hybat Corporation would surely be a green-field venture in Hungary because its trade account remained positive even in the dismal economic environment. Now, the country has a relatively stable business climate and environment which would improve further once the global economy will completely comes out of recession. The exports and industrial output will surely increase with an increase in world demand for Hungary’s products so it can be concluded that Hybat would enjoy enough potential to produce and export 50% of its products to the USA. However, it must also be pinpointed that Hungarian currency will appreciate in the coming months because of economic recovery and growth, so at this moment, the investment in Hungary is cheaper than it will be in the future. In other words, more HUF are available for the US dollar. On the other hand, I can conclude that export revenues will fall with an appreciation of HUF and Hybat will lose out when it would repatriate its profits to the USA after conversion from HUF in the future.