Hello Friends,
I am very thankful to you for your wonderful response to my FOREX topic.
In earlier topics we saw basics, parity relationships, and some part of the hedging. I hope you guys are getting forex, but it will be helpful to you if you solve problems alongwith these concepts.
For earlier parts of forex please click below:
Forex - Part 3 (Parity Relationship)
Today we will proceed for another methods of hedging.
1. Leading and Lagging
2. Netting an Matching
3. Options Contract
4. Futures Contract
From the above methods, Futures contract and Options Contract will be more helpful if you know derivative, because almost 80% part is covered on the concept which is in Derivatives
So guys, lets start with next method i.e. Leading and Lagging
1. Leading and Lagging:
This concept is easy to understand.
In this, Company will see TODAY whether they should Lead in payment TODAY or they should Lag the payment as on today.
It means, if company is gaining after making payment TODAY then company will make the payment and if company is suffering loss if they make payment TODAY then company should make payment as on due date.
Now, suddenly question may arise in your mind that how I will come to know whether I am gaining or suffering loss?
---> Company knowns that how much they want to make payment to the party. then they will simply calculate amount payable on current spot rate and amount payable on forward rate as on due date. Beneficial will be chosen.
* In case of Leading and Lagging, we may have 2 situation,
a) Company is running into Cash Deficit and
b) Company is having Cash Surplus
In case of cash deficit company will have to borrow to make payment if company is leading in payment TODAY, and in case of cash surplus, company will have to loose opportunity of investment. (agar company payment nahi karegi aaj toh kahi na kahi invest karegi toh automatically they will loose surplus on investment as on TODAY)
Leading means company is redy to make payment today
Lag means company is not ready to make payment today.
I hope you guys are getting. It is very easy method. (Just calculate whether your company is getting benefit after making payment as on today, if answer is yes then LEAD in payment otherwise LAG it)
Now we will move to next method i.e. Netting and Matching
2. Netting and Matching:
Hey, it is even easier than Leading and Lagging. Don't think about this method, I know you are aware about this method, earlier this type method is used by you. Now, you may be thinking that may be I am getting mad or something else.
No, I am not getting mad. You applied same type of method in Advanced Accounting in IPCC syllabus in branch accounting. Hey you remeber example of inter branch transaction. Example of Mumbai, Kolkata, Delhi and Chennai's inter branch transaction's problem. It is the same one. In branch accounting what you used to do is that add the amount receivable and less the amount payable and net amount is in your hand may be negative or positive.
In this, just calculate net amount after addition and deduction of amount receivable and payable. Just add the amount receivable and deduct the amount payable and answer will be NET amount (may be negative or positive).
As per Foreign Exchange Management Act, only netting of Bilateral transaction is allowed, multilateral netting is not allowed.
That is the end of the method. Easy na?
3. Options Contract and
4. Futures Contract
Guys these methods will help you if you know about Derivatives. If you know futures and Options in derivative then only you can solve this.
Here, I would like to tell some tricks or clue that may help you in solving problems. and these two methods will become more difficult if you don't know derivatives and you are solving in forex. So first do derivatives then only move to these two methods. 80%-90% these methods are on the based on derivative.
a) If their is Call Option = then we have RIGHT TO BUY BASE CURRENCY
b) If their is Put Option = then we have RIGHT TO SELL BASE CURRENCY
If we are buying base currency, we will purchase CALL OPTION, and if we are selling base currency, we will purchase PUT OPTION.
I am sorry guys but it is very difficult to clear your concepts without solving problem here. I will suggest you to first clear your concept in derivatives and then move to forex.
This is the end of hedging, next part will be the last part of our FOREX topic. In that I will provide you some notes which will be very useful for conceptual clarity and logically it will be helpful to you.
Please please please ask the querries without hesitation at siddharthbumb@gmail.com and please solve the problems..
Thank You
Regards,
siddharthbumb@gmail.com
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