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Tailored FX hedges
FX forwards and bought options are basic FX rate risk management products. Their combinations can be used for constructing hedging solutions tailored to the individual needs of companies.
Tailored FX hedges are combinations of basic products
These structures typically offer a 100% hedge for a pre-determined level but also retain the possibility to benefit from favourable changes in FX rates. The structures may be zero cost instruments, like forwards, or they may be subject to a premium, like options.
Examples of tailored hedging structures
Typically, tailored hedging structures combine the best features of options and forwards by offering a zero cost hedge against unfavourable FX moband by retaining the possibility to benefit from favourable rate changes. You can find two examples of common zero cost structures below.
While a forward fixes the rate at the current level, a risk reversal outlines a fluctuation range for the FX rate. When using a risk reversal, the contracting parties agree on a floor and a cap for the FX rate. For example, an import company will know the lowest possible rate (floor), but will also have the opportunity to benefit up to the cap of the risk reversal. The risk reversal is a zero cost hedging solution.
A company that believes the FX rate will perform favourably but does not want to pay a premium for a hedge can use a participating forward. A participating forward includes an agreement on a hedge level defining the weakest possible FX rate. When the rate moves favourably, the company will benefit from it and receive a pre-determined share (10 - 90%).
Terms and conditions
Executing hedges requires a customer relationship and a general agreement on derivatives with Nordea. Please contact our specialists for further information. We will be happy to help.