CeeDee Lamb Company has a Ringgit 1 Million receivable that it will collect in six months. What are the major hedging techniques it can use to minimize its currency risk on this receivable?
There are many hedging techniques to hedge the risk :
a)Forward contract : The ceedee lamb company can enter in to forward contract in which the future price is fixed irrespective of price increase or decrease
b)Future contract : Under future contract daily settlement is done to calculate net gain or loss .At expiry such gain or loss is added or subtracted from future settlement to calculate final settlement.
c)OPtions : Cee dee company can buy a put option in which it has a right to sell the future receivables if price gets decrease(becomes favorable to company)
d)money market hedge :Under this techinque since the company has asset created in foreign country ,it will borrow money today in foreign country equivalent to present value of future receivables at current borrowing rate .
Then it will convert the borrowings using the current spot rate to home currency and invest it in home market at a given deposit rate for a six months.
At expiry the amount received from deposit in home market is the final amount that is received from receivables.