Hedging Policy Tool & Simulation
Originally published: 05/05/2019 08:39
Last version published: 11/05/2019 11:19
Publication number: ELQ-45371-2
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Hedging Policy Tool & Simulation

Foreign Exchange Hedging Policy Tool to enable simulation of hedged and unhedged exposures using derivatives.

This is a hedging policy tool which is primarily used for assessing and simulating foreign exchange rate movements in terms of the impact on the Earnings Before Interest & Tax (EBIT) and the possibly financial implications of hedging or leaving exposures unhedged.

The simulation covers 2 main financial instruments being a Forward Foreign Exchange Rate instrument and a Range Forward Foreign Exchange Rate instrument.

Both of these will provide a level of risk mitigation that these instruments could offer. However, the cost of these instruments have not been included and therefore would need to be assessed overall in terms of the risk against the cost of purchasing the instruments vs leading the exposure unhedged.

The main purpose is to simulate this hedged and unhedged impact and on the basis of those results make a decision as to the whether the hedge instrument would be needed or not.

This wont necessarily only be from a banking perspective, but also from an operating businesses trading perspective to the extent that its creditors and or debtors are denominated in foreign currencies and these are likely to impact the financial results of the business, therefore possibly needing this impact to be protected by the derivative products mentioned.

This tool also demonstrates how its possible to visually depict simulations of a complex nature and therefore increase financial literacty and enable those that are possibly less familiar with the financial markets and derivatives and how they might decide which approach to take when considering the strategic goals forthe company.

You can download Modeler from this link, which you will need to run the visualisation.

Once downloaded you will have access to make and edit your own files for 60 days. If you need any further information beyond that, please do not hesitate to reach out to us.

This Best Practice includes
1. Excel model 2. Powerpoint 3. PDF extract 4. Modeler visualisation file

Acquire business license for $25.00

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Further information

To demonstrate how one could create a hedging poicy tool and assess effectiveness of different derivative instruments linked to the specific hedging policy and exposure risk apetite. The purpose is to assess the effectiveness of various instruments given a particular range and volatility of foreign exchange rate movements.

For communicating and visualising complex derivative financial instruments and how effective they might be depending on the nature of the foreign exchange rate movements.

Hedge accounting or specific derivative trading activities. Pricing these instruments specifically or the valuation of the instruments.

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