Hedging Opportunities the new generation

• A corporate that engages in any business activity

in a currency other than its own local currency,

has a foreign exchange exposure.

Foreign Exchange Exposure

Possible FX Exposure Types

• Every corporation has a foreign exchange exposure. This includes – Importers– Exporters– Companies that have taken a foreign

loan– Multinational companies that need to

pay their employees salaries and taxes in different currencies.

Possible Hedging Tools

• Forward Deal• Buy Vanilla Option• Vanilla strategy (e.g. Risk Reversal)• Buy a Knock Out Option• Exotic Strategies

Comparing Forwards and Options

• Forwards:– Underlying exposure is offset by engaging in a

Forward deal– Obligation to exchange funds on maturity date – No future potential of additional gains from market

fluctuations

Comparing Forwards and Options

• Options– No obligation to exchange the underlying asset on

maturity date (for the buyer)– Vast possibilities of tailoring unique solutions

according to specific needs (OTC)– Opportunity to highly leverage one’s position

Illustration

• A European corporate is selling goods to a corporate in Great Britain.

• The corporate will receive 10 Million GBP in 9 months’ time

• Analysis:– Receivables in GBP, cost base in EUR– The European company needs to convert these GBP

into EUR – The European company will lose money if GBP/EUR

rate depreciates

Illustration

• Hedging possibilities:Forward Deal- Sell 10 Million GBP against EUR

settling in 9 months at a fixed rateBuy a Put GBP Call EUR Option Enter into a Vanilla Strategy (Typically a Risk

Reversal)Exotic Option Strategies

Illustration

• Sell 10 Million GBP against EUR at a strike of 1.49, on the 27 of June 2006

Forward

Buy Vanilla EUR Put

Buy Vanilla GBP Put (ATM)

• A European company will profit if GBP/EUR trades above the Forward Rate @ expiry

• Full protection from Strike price downwards

Risk Reversal

Risk Reversal

• A European company will profit if GBP/EUR trades above the Forward Rate and below 1.4880 (the SP of the sold Call GBP option @ expiry)

• Full protection from Strike price of the Put Euro option downwards

• No initial hedging costs

(“Zero Cost”)

Buy 1.4880 GBP Put with 1.4913 KO

Buy 1.4890 Euro Put with 1.49 KO

• A European company will profit if GBP/EUR trades above the Forward Rate @ expiry

• Full protection from Strike price downwards• Smaller hedging cost on inception date

Regulations & Accounting Standards

• Increasing regulations (FAS 133, IAS 39) require special attention by CFO’s and Treasurers to possible Fx exposure

Exotic options strategies for corporates – why?

• Enables a hedger to decrease hedging costs• A highly customizable hedging solution• Provides the opportunity to create mixed strategies

(Vanilla & Exotic – e.g. buy a vanilla, sell an exotic)

Exotic options hedging strategies

• Forward Extra• Window • European Knock In• Step Premium• Improver

Critical Hedging Tools

• Historical Data• Volatility Surface• Risk Management Tools • Reporting • Mark to market facility

Summary – Using SD-FX

• FX options can enable hedgers to profit from market fluctuations, customize tailor made solutions, while being completely hedged

• SD-FX allows you to price these options accurately and to abide by the accounting regulations

• For more details please contact:

Irene ZaslavskyTel: +44(0)20 7724 4167i.zaslavsky@superderivatives.com