自修课程 Dynamics of Foreign Exchange

Login

Def·i·ni·tion

The exchange rate is the price of the base currency in terms of the quote currency.

the base currency and the quote currency
In the euro-pound example, if EUR/GBP is £ .6814, then £ .6814 will purchase one euro.

Objective of Hedging

Hedging is offsetting price risk in any cash market by taking an equal but opposite position in the futures market. By offsetting price risk, the hedger is assured of not being disadvantaged by adverse price movements. For example, a French oil company with a U.S. dollar revenue stream may be interested in using CME Euro FX futures contracts to protect its revenue from a declining dollar. Establishing an exchange rate in this way allows the company to avoid the risk of the dollar falling in value before reporting its financial results. This also means the company misses an opportunity should the dollar rise in value. However, from the hedger’s perspective, this lost opportunity is not a concern since the objective of hedging is risk reduction, not profit maximization.

Comment:  The big picture is hedge but how to hedge, what is hedge plan, how to execute hedge plan, how many
                  phases should go through.  How to maximize profit when hedge and what percentage in the whole portflio

Keyword: Offsetting
Definition: Taking a second futures or options on futures position opposite the initial or opening position, selling if one has bought or buying is one has sold.