Did the subprime crisis affect the hedging market?

Résumé du document

The aim of this paper is to analyze if the financial crisis has changed the use of hedging techniques. Forecasting is the process of estimation of unknown situations. Forecasting is use to estimate a risk. It can be exchange rates risks, economic exposure, translation exposure, etc. In this chapter I'll expose some forecasting techniques related to the exchange rate or transaction exposure. The technical forecasting involves the use of historical rate data and with this data, to predict the future exchange rate. This technique is very popular because of the ease of use. However, this technique can be criticized because the future exchange rate doesn't depend on the past but on the future events and information. But speculators use it in order to capitalize on the day-to-day exchange rates.

Extraits

[...] A forward contract is similar to a future hedging. The difference is that forward contract is generally use for bigger transaction that a future hedge. A forward contract is negotiated between a commercial bank and a large company. It specified the currency, the exchange rate and the date of the transaction. Money market hedge A money market hedge involves the borrowing or lending of a currency in order to reduce or eliminate the transaction risk. The fact of lending or borrowing depends of the transaction: you can have payable or receivables. [...]

[...] The second one is that because of the unpredictable and volatile exchange rates more businesses wanted to limit their risk and tried to hedge it by one way or another. As final result, the hedging techniques became more popular and more expansive. Thus the subprime crisis has affected the hedging market but the both effects balanced themselves. It seems that the hedging market hedged itself. [...]

[...] The second is to sell currency futures. This technique goes in the other way. Your business will sell a specified amount in a specified currency for a stated price on a specified date. This is use when you have receivables in a foreign currency. By this way the firm locks the future evolution of the exchange rate. Forward hedge A forward contract is an agreement between two parties to buy or sell an asset at a specified point of time in the future. [...]

[...] But it is not compulsory. It means that you buy the right to purchase a currency at a specified price by paying a premium. If the exchange rate appreciates you have no risk because you use the right of the option. If the exchange rate depreciates than you don't use the option and you pay your payables whit the future spot rate. The only cost in the second case is that you lose the premium. If you have receivables you can use put options. [...]

[...] According to these to fact we've seen on one hand a stable volume of hedging action by options, future and forward hedging but with a higher total amount of money. And on the other hand a decrease of use of the money market for hedging currency risks. Conclusion As a conclusion we can say that there where two different impacts of the subprime crisis on the use of hedging. The first one is that a lot of investing banks went bankrupt with as result a lot of distrust of the survivors. So it became more expansive to borrow money because of less and more cautious lenders. [...]