Currency Exchange Risk Hedging Model

Compare a Forward Contract hedge vs. an Unhedged scenario for a future foreign currency transaction.

Transaction Type: Are you receiving foreign currency (Receivable) or paying foreign currency (Payable)? Foreign Currency Receivable Foreign Currency Payable

Foreign Currency (FC): The currency of your transaction (e.g., EUR, JPY). EUR (Euro) GBP (British Pound) JPY (Japanese Yen) AUD (Australian Dollar) CAD (Canadian Dollar) CHF (Swiss Franc) CNY (Chinese Yuan) INR (Indian Rupee)

Domestic Currency (DC): The currency you want the final value to be in (your home currency, e.g., USD). USD (US Dollar) EUR (Euro) GBP (British Pound) JPY (Japanese Yen) AUD (Australian Dollar) CAD (Canadian Dollar)

Financial Parameters

Amount in FC: The total amount of foreign currency to be received or paid.

Current Spot Rate (FC/DC): Today's exchange rate. (e.g., if FC is EUR and DC is USD, this is EUR/USD, meaning 1 EUR = X USD)

Forward Rate (FC/DC): The exchange rate you can lock in today for the future transaction date.

Expected Future Spot Rate (FC/DC): Your best guess of the spot rate on the transaction date if you don't hedge.

Hedging Analysis

Unhedged Outcome (DC):

Hedged Outcome (Forward Contract) (DC):

Effective Unhedged Rate:

Effective Hedged Rate:

Net Outcome of Hedging (DC):

Comparison of Outcomes (DC)

Understanding the Model

• This tool compares two scenarios for a future foreign currency transaction:
  1. Unhedged: You accept the market spot rate on the future transaction date. The outcome here is based on your Expected Future Spot Rate.
  2. Hedged (Forward Contract): You lock in an exchange rate today (the Forward Rate) for the future transaction. This eliminates uncertainty about the rate.
• The "Net Outcome of Hedging" shows the difference in your domestic currency between these two scenarios, based on your expectation.
• Rate Convention: All rates (Spot, Forward, Expected) should be entered as '1 unit of Foreign Currency = X units of Domestic Currency' (e.g., 1 EUR = 1.08 USD).
• This model does not account for the costs of entering into a forward contract, which can vary.