Financial impact of using EUR call options to hedge accounts receivables

2021 ◽  
Vol 09 (02) ◽  
Author(s):  
Kenneth B. McEwan ◽  
Keyword(s):  
Supply Chain ◽  
Exchange Rate ◽  
Financial Risk ◽  
Foreign Currency ◽  
Time Frame ◽  
Exchange Rate Risk ◽  
Financial Loss ◽  
Call Options ◽  
Rate Risk ◽  
Financing Costs

International business has grown rapidly in recent years as companies seek to take advantage of expanding supply chain opportunities. As companies enter into contracts to take advantage of engineering, production, and cost reduction capabilities of the global supply chain, they may be creating a foreign currency exchange rate risk. The purpose of this research was to determine the EUR/USD exchange rate risk within a relatively short time frame such as in 60-day accounts receivable and if using currency options to hedge this risk would be financially beneficial on a transactional basis. The quantitative study examined the 60-day EUR/USD exchange rate fluctuation and the use of currency call options to hedge the risk associated with EUR/USD currency fluctuations. The researcher analyzed 13 years of historical EUR/USD currency data and 10 years of actual EUR call options premiums for this research paper. The researcher concluded that the variability of the EUR/USD over 60-days does pose financial risk to a company. The study also found that using currency call options to hedge this 60-day exchange rate risk resulted in an overall transactional financial loss as compared to no hedging. However, research studies have shown that the use of hedging instruments to smooth financial results may result in lower overall financing costs which could offset the hedging transactional costs. This study did not address the benefits of the use of hedging to smooth financial results or obtain other related financial benefits. The researcher recommends that a firm should recognize the exchange rate risks it may be establishing within 60-day EUR or USD payable contracts and develop an appropriate hedging strategy.

scholarly journals Financial impact of using EUR call options to hedge accounts receivables

2021 ◽  
Vol 12 (01) ◽  
Author(s):  
Dr. Kenneth B. McEwan ◽  
Keyword(s):  
Supply Chain ◽  
Exchange Rate ◽  
Financial Risk ◽  
Foreign Currency ◽  
Exchange Rate Risk ◽  
Financial Loss ◽  
Call Options ◽  
Currency Exchange ◽  
Rate Risk ◽  
Financing Costs

International business has grown rapidly in recent years as companies seek to take advantage of expanding supply chain opportunities. As companies enter into contracts to take advantage of engineering, production, and cost reduction capabilities of the global supply chain, they may be creating a foreign currency exchange rate risk. The quantitative study examined the 60-day EUR/USD exchange rate fluctuation and the use of currency call options to hedge the risk associated with EUR/USD currency fluctuations. The researcher analyzed 13 years of historical EUR/USD currency data and 10 years of actual EUR call options premiums for this research paper. The researcher concluded that the variability of the EUR/USD over 60-days does pose financial risk to a company. The study also found that using currency call options to hedge this 60-day exchange rate risk resulted in an overall transactional financial loss as compared to no hedging. However, research studies have shown that the use of hedging instruments to smooth financial results may result in lower overall financing costs which could offset the hedging transactional costs. This study did not address the benefits of the use of hedging to smooth financial results or obtain other related financial benefits. The researcher recommends that a firm should recognize the exchange rate risks it may be establishing within 60-day EUR or USD payable contracts and develop an appropriate hedging strategy.

General Guidelines for the Conversion of Damages Calculated in Foreign Currency: Tort Claims

2019 ◽  
Vol 28 (1-2) ◽  
pp. 1-14
Author(s):  
Antonio Avalos
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Foreign Currency ◽  
Exchange Rate Risk ◽  
Economic Factors ◽  
Risk Allocation ◽  
Rate Risk ◽  
Legal Arguments ◽  
The Law ◽  
Tort Claims

Abstract This paper contributes to the debate about determining the proper procedures for the conversion of damages calculated in foreign currency into U.S. dollars by offering general guidelines applicable to tort claims. The analysis expands beyond the typical discussion of selecting the appropriate conversion date by examining other relevant economic factors such as exchange rate risk allocation, the application of an adequate interest rate for the calculation of pre- and post-judgment interest, and the implications of the currency in which the plaintiff suffers the loss. While aiming at properly and fairly compensating the plaintiff as the essential goal of the law on damages, the general guidelines for damages conversion presented rely more on economic principles than on legal arguments.

scholarly journals ANALISIS PENGGUNAAN FORWARD CONTRACT DAN OPTION PADA PERUSAHAAN EKSPOR UD DAMENA DI DENPASAR

2018 ◽  
Vol 7 (4) ◽  
pp. 2226
Author(s):  
Gita Syeba Lubis ◽  
Henny Rahyuda
Keyword(s):  
Exchange Rate ◽  
Foreign Currency ◽  
Behavioral Observation ◽  
Exchange Rate Risk ◽  
Risk Hedging ◽  
Rate Risk ◽  
Forward Contract ◽  
Processing Product ◽  
Quantitative Descriptive ◽  
Collection Methods

  The export company receives income in foreign currency so it will be affected by the exchange rate risk. The purpose of this research is to know the application of hedging forward contract and option method in UD Damena (Seafood Supply & Processing Product) in 2014-2016. This research is quantitative descriptive. The research object used is the resultt of forward contract and option usage which is seen from the increase of foreign exchange differences from export transaction receivables obtained by UD Damena (Seafood Supply & Processing Product) in year 2014-2016. Data collection methods is non-behavioral observation by collecting data from written sources. Data analysis techniques using descriptive techniques by describing the phases of forward contract and option systematically. The results concluded that forward contract and option minimize the risk of exchange rate by generating greater exchange rate difference and option resulted in a lager exchange rate increase than the forward contract.   Keyword: exchange rate risk, hedging, forward contract, option.  

Supply chain outsourcing under exchange rate risk and competition

Omega ◽  
2011 ◽  
Vol 39 (5) ◽  
pp. 539-549 ◽  
Author(s):  
Zugang Liu ◽  
Anna Nagurney
Keyword(s):  
Supply Chain ◽  
Exchange Rate ◽  
Exchange Rate Risk ◽  
Rate Risk

scholarly journals INVESTING THE PRICING OF EXCHANGE RATE RISK IN THE STOCK MARKET: EVIDENCE FROM PAKISTAN STOCK MARKET

2016 ◽  
Vol 12 (2) ◽  
Author(s):  
Muhammad Tariq ◽  
Keyword(s):  
Exchange Rate ◽  
Stock Market ◽  
Term Structure ◽  
Discount Rate ◽  
Risk Premium ◽  
Foreign Currency ◽  
Stock Exchange ◽  
Exchange Rate Risk ◽  
Rate Risk ◽  
Currency Exposure

Objective: This paper is designed to empirically examine the pricing of exchange rate risk in the stock market in Pakistan. Methodology: The study is based on two-factor and multi-factor arbitrage pricing models. The empirical evidences are based on 15 years monthly data from January 1998 to December 2015, for exchange rate, discount rate, inflation, t bill and the Karachi Stock Exchange (KSE) 100 indexes is collected from State Bank of Pakistan and Karachi Stock Exchange. Results: The results, however, conclude that the exchange rate risk is priced in the stock market. Whereas, the remaining factors such as risk premium attached to foreign currency exposure and the term structure of discount rate appear to have significant effect on exchange rate risk. We can generalize that the exchange market in Pakistan are influenced by the stock market. Policy implication: This paper provides empirical evidence that the risk exposure of exchange rate is largely influenced by the changes in stock market. Therefore, the concerned persons are proposed for the consideration of this issue.

scholarly journals On the spillover of exchange rate risk into default risk

2009 ◽  
Vol 54 (183) ◽  
pp. 32-55 ◽  
Author(s):  
Milos Bozovic ◽  
Branko Urosevic ◽  
Bosko Zivkovic
Keyword(s):  
Exchange Rate ◽  
Default Risk ◽  
Foreign Currency ◽  
Feedback Mechanism ◽  
Exchange Rate Risk ◽  
Negative Feedback Mechanism ◽  
Market Participants ◽  
Local Currency ◽  
Rate Risk ◽  
The Exchange Rate

In order to reduce the exchange-rate risk, banks in emerging markets are typically denominating their loans in foreign currencies. However, in the event of a substantial depreciation of the local currency, the payment ability of a foreign-currency borrower may be reduced significantly, exposing the lender to additional default risk. This paper analyses how the exchange-rate risk of foreign currency loans spills over into default risk. We show that in an economy where foreign currency loans are a dominant source of financing economic activity, depreciation of the local currency establishes a negative feedback mechanism that leads to higher default probabilities, reduced credit supply, and reduced growth. This finding has some important implications that may be of special interest for regulators and market participants in emerging economies.

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