Professional Documents
Culture Documents
Benefit Range
25% Participation
+
P & L
50%Participation
75% Benefit 50% Benefit 25% Benefit
75% Participation
Participating Forward as a Hedge A holder of a currency payable would purchase a participating forward to conservatively hedge against a currencys appreciation while allowing for varying degrees of unlimited benefit from the currencys depreciation.
Foreign Currency
Payable & Hedge
+
Currency Payable
Currency View Very Bullish Bullish Neutral Bearish Very Bearish Volatile
A hedger who can tolerate more downside risk can set the call strike farther out-of-the-money. As a result, the sold put is based on a smaller notional amount which allows the hedger to participate in a larger percentage of any currency depreciation. Conversely, a hedger who cant tolerate as much downside risk will set a strike closer to the forward and have a higher level of protection. For this added protection, she will not receive as much benefit as the currency depreciates. In order to achieve a zero cost, the buyer will either specify the participation ratio or the strike price for both options. This strategy allows the buyer the flexibility to set as high or as low a participation rate as desired, depending on risk tolerance. Companies that want a flexible, conservative currency hedge with zero to low cost may find a participating forward attractive. It is particularly suited to protect a maximum payables estimate from currency appreciation while simultaneously allowing some upside potential on a minimum payables estimate.
Currency View Very Bullish Bullish Neutral Bearish Very Bearish Volatile Market Place Frequency Liquidity Hedge Accounting for Transactions for Anticipated
Low....................................High
Yes.......................................No