Chapter 10 Pros and Cons of Hedging techniques

Pros of a forward contract

• Locked into an FX rate

• Tailor made

Cons of a forward market

Legally binding and there is no secondary market

Pros of a money market hedge

• Locked into an FX rate

• Tailor made

Cons of a money market hedge

• Use up the company’s credit lines

• In case of receipt, if customer pays late there will be a problem repaying the dollar loan

• No secondary market

Pros of a OTC Currency Option

• Allows company to take advantage of the upside potential of £ strengthening against $ and protect against downside risk.

Cons of a OTC Currency Option

• No secondary market

• Premium can be expensive

Pros of Currency futures

• Secondary market available

Cons of currency futures

• Not possible to hedge exact amount due to standard contract size (Exchange traded)

• Basis risk