How to insure against currency fluctuations
30.06.2011 16398

How to insure against currency fluctuations

From December 2008 to February 2009, the euro against the ruble rose by 20%. This ate up all the planned profit on orders already made for the spring-summer. And this means that the cost of European shoes in the purchase of the next season will grow by the same amount. But most of all, retailers are concerned that it is not yet clear what will happen to the exchange rate next. Someone expects a collapse of the euro, someone - strengthening, and all have their own irrefutable arguments. Is it possible to insure yourself and your partners against possible losses due to such sharp fluctuations in the exchange rate? Can. Let us arm ourselves with theory and defend ourselves with practice. Tatiana Belova studied theory and practice.

SR66_Vektor_Valuta_2.jpgWhich of the foreign exchange risks does trading companies face the most?

There are three main currency risks: operational, translation (balance sheet) and economic (competitiveness). For trading companies, the most significant risk is operational.

Operational risk is the opportunity to lose profits or incur losses as a result of the direct impact of exchange rate changes on expected cash flows. How does this affect trading companies? From the point of view of European suppliers of shoes to Russia, the uncertainty of the value of exports in national currency, if the invoice is issued in foreign currency, may hamper the import of shoes, since there are natural doubts that the imported shoes can ultimately be sold with profit.

From the point of view of Russian purchasers, the uncertainty of the value of imports in national currency, the price of which is set in foreign currency, increases the risk of losses from imports, since in terms of national currency the price may not be competitive.

Importers receiving invoices in foreign currency also face uncertainty when estimating the value of imports in national currency. This is especially difficult for them in the case of sales sensitivity to price changes, when, for example, their competitors are domestic producers who are not affected by changes in exchange rates, or importers receiving invoices in foreign currencies, whose exchange rate is favorable direction.

Falke Group Regional Director for Eastern Europe (Germany), Devil Kurbanov, said the two sides are speculative and speculative. The fall of the national currency (ruble) against the foreign (dollar or euro) worsens your working conditions, but the reverse is also true: strengthening the national currency against the foreign improves the working conditions of trading companies. This is the two-sided nature of the risk.

To protect the company from these fluctuations, you can use full or partial (selective / targeted) insurance.

Since the Falke Group is a client of Deutsche Bank, at its request, the bank's specialists have calculated the possible value of the euro against the ruble for August 2009. According to their calculations, the rate from 42,3 rubles. (at the time of calculations) by August will change by 26 kopecks - up to 42,56 rubles. Considering that the purchase price of a seasonal collection is tens, and for some companies even hundreds of thousands of euros, even such a fluctuation is sensitively reflected in financial flows. Not to mention the fact that some trading companies are already making their forecasts and calculations at the rate of 50 rubles per euro, and then the difference becomes even more tangible.

What methods of protection against fluctuations exist?

The risk may be affected by the timing of receipt or payment of money, the currency in which the price is expressed.

You can insure against the risk of changes in exchange rates using derivatives - derivative financial instruments used in transactions that are not directly related to the purchase and sale of tangible or financial assets.

The main types of derivatives: futures, forwards, options, swaps.

SR66_Vektor_Valuta_3.jpgHow derivatives work

Devil Kurbanov, using the example of one purchase, tried to explain the scheme according to which futures work. For example, a European company in February this year purchases 500 kg of cashmere in China and wants to receive and pay it in the summer. She will pay in euros. When the financiers of the company begin to calculate how much the Chinese partners will offer in six months, they begin to tear their hair out, realizing that in half a year the amount will be fairly round. And then the company turns to the bank, saying that six months later it is ready to pay the Chinese counterparty at the rate fixed in February.

If the euro exchange rate rises relative to the rate fixed by the bank, then the bank will put the difference in its pocket as payment for the risk assumed. The company will be content with the desired constancy of course. If the euro falls relative to the rate fixed by the bank, the bank will pay the difference to the company. The company is again content with a constant exchange rate, and the bank receives a loss (the result of the risk assumed). The constant interest of the bank in both cases is that it receives interest from the operation. The constant interest of the company in both cases is that it plans to earn money on a contract with China, and in the process of negotiating a contract it will have a reliable basis for discussing price conditions.

For the operation, it is enough to call the banking operator and specify for him the day of fulfillment of the obligation, the method and way of payment. The main plus of the method is that you can plan your financial flows. The disadvantage of this method is that the operation is standardized: you can only deposit one amount and only one payment method, you need to make a deposit (2-5%), and the final payments are made on the day the operation is completed, and this condition can no longer be changed.

Pros and Cons of Futures



exchange - guarantor of performance (through guarantee and insurance funds)

automatic crediting of profit / loss every day (variation margin)

ease of exit (cancellation by offset transaction is a beneficial consequence of standardization)

liquidity (there are always sellers and buyers)

standardization according to the rules of the exchange (type of goods, volume of goods, place of delivery)

place of transaction (exchange only)

lack of price confidentiality

deposit of security funds - guarantee support (demonstration of honest intentions for full payment of goods upon delivery)

commission payment

Pros and Cons of Forwards



exchange - guarantor of performance (through guarantee and insurance funds)

automatic crediting of profit / loss every day (variation margin)

ease of exit (cancellation by offset transaction is a beneficial consequence of standardization)

liquidity (there are always sellers and buyers)

standardization according to the rules of the exchange (type of goods, volume of goods, place of delivery)

place of transaction (exchange only)

lack of price confidentiality

deposit of security funds - guarantee support (demonstration of honest intentions for full payment of goods upon delivery)

commission payment

Pros and cons of options

The buyer has the right (in the absence of obligations) to use the option or not to use. In this possibility of choice, their main charm. Minus - relative high cost.

What strategy and when to use?

If the currency position is not hedged, the value of the corresponding asset will fluctuate along with changes in the spot rate. Futures hedging will fix a firm rate, which will protect the value of assets from adverse changes in the exchange rate, but at the same time exclude the possibility of gain from favorable changes in the exchange rate. Optional hedging will fix the rate and at the same time in exchange for a premium will leave the possibility of winning from a favorable rate movement.


Hedging (from English hedge - to protect) - insurance of currency risks.

Currency risk - the probability of loss of funds as a result of changes in exchange rates.

Derivative - a derivative financial instrument - an agreement between two parties under which they assume an obligation or the right to transfer a specific asset or amount of money on time or before it occurs at an agreed price.

Forward - a contract of delivery with a deferred payment at a strictly fixed price.

Futures is a forward standardized under the rules of the exchange.

An option is an agreement under which a buyer receives the right (but not the obligation) to make a purchase or sale of an asset at a predetermined price.


Russia in 2009 year may reduce export revenues to $ 269 billion, import revenues will decrease to $ 245 billion, said Finance Minister Alexei Kudrin, speaking at a government hour in the State Duma in late January. At the same time, despite the decline in prices due to falling global demand, in the Russian economy, as noted by A. Kudrin, in contrast to the US economy and the eurozone, there is a high risk of inflation, which must be taken into account in monetary policy. According to him, the devaluation of the national currency leads to increased competitiveness of products of Russian exporters (in particular, oil companies), and there is compensation for a decrease in export earnings.

On the other hand, there is a second trend - a decrease in imports and a decrease in the amount of currency spent on it. “These two opposite trends correct the balance of payments,” said the Minister of Finance. “I think that within a year and a half we will return to a stable situation, and the ruble will work reliably, again attract all the investments and attention of our citizens.”

Yuri Zverev, British company Clarks:

- Unfortunately, Russian practice has taught us not to trust banks. And we have not used all derivative financial instruments and do not plan to use them. We rely only on our own strengths.

Johan Ber and Stefan Frank, German company K&S:

- Yes, we noticed that people began to pay more attention to the price of models, no one wants to overpay. In our opinion, this is a reasonable approach. And since it is important for us to maintain both the purity of the assortment and the quality of shoes, we did not begin to change either materials, designs, or payment terms. Traditionally, our customers pay 30% advance and 70% - until the collection is shipped.

Joseph Robel, Italian company IMAC:

- The payment terms we have been and remain traditional: advance + full payment of delivery before shipment. It seems to me that changes in the exchange rate and customs duties do not affect the business so much, the main thing is that the collection be sold.

Boris Guschin, Slovenian factory Alpina:

- The currency part of the collection value in the purchase remained the same, only the ruble part increased. For regular customers we have made a discount on the spring-summer collection so that they remain on the market. To support customers, we provide them with a commodity loan and a deferred payment, while taking a relatively small prepayment - 5-10%. The client pays the rest after receiving the delivery.

From December 2008 to February 2009, the euro exchange rate against the ruble grew by 20%. This ate all the planned profit for the orders already made for spring-summer. And that means the same ...
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