Great Eastern Toys

The current 50% hedging policy executed at the fund level has served well for OTPP for the past ten years, contributing to the fund’s positive returns. The FX Hedge Program not only has minimized the downside risk, but has also limited the upside potential. If OTPP decided not to implement a hedging program in 1996, they would have lost about $983 million CAD over the ten year period (1995-2005) which is valued at 2% of the portfolio. With the hedging program, OTPP was able to reduce the overall loss to about $469 million CAD, but also limited the gain from the depreciation of the pound.(Exhibit 1) Hedging is an excellent short-term risk minimizing strategy for long term investors, sustaining a continual payout of pensions during volatile times in OTPP’s invested currency markets. Currently, approximately 21% of OTPP’s net assets are exposed to foreign currency risk. Consequently, it is essential that OTPP maintain a risk management program of hedging, as slight currency fluctuations can significantly affect the value of the fund. Similarly to continual renewal of swaps, hedging can be a very expensive risk management strategy.

General Motors Corporation, the world’s largest automaker, has an extensive global outreach, which places the firm in competition with automakers worldwide, and subjects itself to significant exchange rate exposure. In particular, despite most of its revenues and production being derived from North America, depreciating yen rates pose problems for the firm indirectly through economic exposure. While GM possesses ‘passive’ hedging strategies for balance sheet and income statement exposures, management has not yet quantified or recognized solutions to possible losses from the indirect competitive exposure it now shared with Japanese automakers in the U.S import

Summary: As the Mexican Peso, financial markets hit record lows it has lead investors across the globe to hedge on emerging markets, which are nations that are in the process of rapid growth and industrialization. As it stands the peso is one of the currencies that has very few limitations on trading has been very attractive to investors looking to hedge bullish positions by going short or betting the peso will decline. A trade that has been quite popular amongst investor has been to buy Brazilian stocks and selling the peso due to the Brazilian currency controls. Although the

1. This is a contract from credit card receivables securitization, a kind of bonds finance collateralized by credit card receivables. Every Contract of security has a face value at maturity of $100,000 and will mature in 2.5 to 5 years. The price of the contract changes by 1/32 a point but cannot be 3 points above or below the previous day’s

Even though children have plenty of electronic gadgetry and plastic items for toys and entertainment today, you may be surprised to hear that wooden toys are back in demand on online stores. Such toys come in the shape of trains, wagons, blocks, cars, puzzles and more.

Tiffany and Co concluded an agreement with its Japanese Distributor, Mitsukoshi Limited. Tiffany & Co Japan assumed management responsibilities of the operation of 29 boutiques and was now responsible for millions of dollars of inventory that was previously sold wholesale to Mitsukoshi Limited. Tiffany & Co Japan now faces the risk of foreign currency fluctuations previously borne by Mitsukoshi Limited. Tiffany & Co Japan must now make the decision between basic hedging alternatives: Entering into forward agreements to sell yen for dollars or purchasing a yen put option.

In the aftermath of the financial crisis and due to fears that the dollar might lose its predominant status, the search for alternative currencies has intensified. Although it is improbable that a shift from the dollar will happen in the near future, private investors and central bankers have highlighted the need for portfolio diversification towards alternative currencies. In the first quarter of 2013, about 94 percent of allocated foreign exchange reserves comprised of holdings in the 5 traditional reserve currencies: dollar, euro, pound sterling, Swiss francs, and Japanese yen. On the other hand, other currencies accounted for just 6 percent of allocated foreign exchange reserves . Besides the emerging market currencies

Mr. Archer-Lock visualized this „dilemma“ in a two-by-two-matrix that shows three more or less critical scenarios. Starting from this insights Mrs. Tabaczynski developed a spreadsheet which should enable them to optimize their hedging strategies – more or less forwards or options respectivly the quota of hedging at all – by executing multiple sensitivity analysis on the key variables sales and exchange rates at different proportions of contracts (forwards) and options as well as different hedging ratios (0%, 25%, 50%, 75% and 100%). This tool doesn 't solve the risks totally, but seems to help choosing the right hedging strategy.

Current Strategy. The company has been hedging the US dollar long position by estimating its annual US dollar sales and hedging that exposure by purchasing put options on the US dollar (the right to sell US dollars for euros at a specific exchange rate). The company has been purchasing these options in what it refers to as a “three-year rolling hedge” in which it hedges expected US dollar sales three years out

In the literature three types of exposure under floating exchange rate regimes are identified; economic, translation and transaction. Translation and transaction exposures are accounting based and defined in terms of the book values of assets and liabilities denominated in foreign currency. Economic exposure is

So, in order to prevent the price difference we gained getting eroded from short term or even long term exchange rate volatility, we will need a stable currency market on our back so that our revenue won’t fluctuates significantly every year. However, the currency market is the most volatile market on earth, it will never be stable. And it has come to my attention that due to the huge fluctuation of some currencies’ value, our cost of purchasing goods in some countries has been increased significantly. Moreover, I realized as a new formed company, we don’t have a very matured hedging strategy to offset our currency exposure, also cost of strategy we currently implemented in

The graph describes the foreign exchange reserves in China which expressed a dramatic increase between 1985 and 2006. Due to the Chinese economy development, an increasing number of foreign investments are keen to enter the Chinese capital market. Moreover, a significant number of Chinese corporations would gain more opportunities to cooperate with foreign companies and learn from each other. It also provides them enough foreign capital to invest in the international markets. But a large amount of foreign capital holding flow into China that may pose threat to domestic companies, namely the foreign companies may rob the domestic companies’ market share for their future development. So the Chinese government may consider building a security limitation of foreign exchange reserves.

There is a large set of literatures about pros and cons of hedging. The first advantage of hedging is minimizing foreign exchange rate risk. Firms will increase their use of foreign exchange derivatives to hedge against the negative effects of currency risk directly related to their operations (Menon, S., & Viswanathan, K. G., 2005). Exchange rates risk is one of the major problem that face by the non- financial companies. Changes in exchange rate will influence volume of foreign trading, the costs of foreign purchasing, profile and the structure of foreign markets in which the company operates in the long run effect. Exchange rate changes could affect profit margins, through their effect on sources for inputs, markets for outputs and debt, and the value of assets (Papaioannou, M. G., 2006). The operational hedging appears to be robust to increased exchange rate volatility suggests that firms without (or with limited) operational hedges should carefully consider the possibility of using this more robust protection against foreign exchange risk (Hutson, E., & Laing, E., 2014). So, the hedging can be used as a risk management tool by the investors to minimize the foreign exchange risk.

Moreover, the client would also like to understand the impact of FX on the portfolio, i.e. if the value of the portfolio is mainly driven by the stock indexes rather than FX movements. Lastly, if the impact of FX is significant, the client would like to know the possible methods off hedging the FX risk. The returns will be evaluated in terms of USD as the client is based in US. This research will focus in the period of 1999 to 2014, which is the period just after the Asian financial crisis and during the 2008 financial crisis.

a) Should a company hedge its foreign exchange exposure? Explain reasons for and against hedging.