The Handbook of Corporate Financial Risk Management (2nd Edition)
First published:
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Cyclicality of Currencies and Use of Options to Manage Credit Utilisation
Foreword
Introduction
Theory and Practice of Corporate Risk Management
Theory and Practice of Optimal Capital Structure
Introduction to Funding and Capital Structure
How to Obtain a Credit Rating
Refinancing Risk and Optimal Debt Maturity
Optimal Cash Position
Optimal Leverage
Introduction to Interest Rate and Inflation Risks
How to Develop an Interest Rate Risk Management Policy
How to Improve Your Fixed-Floating Mix and Duration
Interest Rates: The Most Efficient Hedging Product
Do You Need Inflation-linked Debt?
Prehedging Interest Rate Risk
Pension Fund Asset and Liability Management
Introduction to Currency Risk
How to Develop Currency Risk Management Policy
Translation or Transaction: Netting Currency Risks
Early Warning Signals
How to Hedge High Carry Currencies
Currency Risk on Covenants
Optimal Currency Composition of Debt 1: Protect Book Value
Optimal Currency Composition of Debt 2: Protect Leverage
Cyclicality of Currencies and Use of Options to Manage Credit Utilisation
Managing the Depegging Risk
Currency Risk in Luxury Goods
Introduction to Credit Risk
Counterparty Risk Methodology
Counterparty Risk Protection
Optimal Deposit Composition
Prehedging Credit Risk
xVA Optimisation
Introduction to M&A-related Risks
Risk Management for M&A
Deal-contingent Hedging
Introduction to Commodity Risk
Managing Commodity-linked Revenues and Currency Risk
Managing Commodity-linked Costs and Currency Risk
Commodity Input and Resulting Currency Risk
Offsetting Carbon Emissions
Introduction to Equity Risk
Hedging Dilution Risk
Hedging Deferred Compensation
Stake-building
We have already referred to the difference between the static and dynamic risk management in Chapter 16. In this chapter, we shall see another application of the dynamic policy. We will examine three key topics:
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the cyclicality of the EURUSD exchange rate;
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how companies with long-dated EURUSD exposure can use the cyclicality to develop a dynamic hedging strategy; and
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how companies can use FX options instead of forwards to reduce the utilisation of credit lines.
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Some companies have long-dated predictable foreign cashflows due to the nature of their business. For example, in the construction and airspace sectors, multi-year contracts in a foreign currency are common. Normally, contracts are signed in USD while a significant part of operating costs is in EUR, GBP or another currency. For these companies, currency risk management is a strategic issue, since their pricing is often compared against that of their USD competitors with a large part of USD costs. If the EUR exporter does not manage the currency risk carefully, it may not be able to offer a competitive price, or will remain exposed to the currency risk on its profit
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