Hedging decisions usually boil down to a choice between options and forwards.
In the past, many treasurers would have automatically opted for the latter, where cash flows were certain – or at least highly probable – but there are a number of scenarios in which this assumption can be flawed.
Firstly, the corporate’s business may be correlated to the foreign currency being hedged, which is typically the case in emerging markets. If a company selling goods in Russia and hedging expected sales in RUB hit trouble, sales volumes would fall and the company could find itself over-hedged.
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