Forum Archive Index - May 2002

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Further to my post on the $NZ, I think I have a reasonable grasp of 
how currency hedging works for a New Zealand company.

The NZ company approaches a speculator.  The speculator has an idea 
where the $NZ will be in a few years time.  The speculator adds a 
margin to where they think the $NZ will truly be.  The NZ company is 
happy to accept what is in effect a bet at that level.  
Statistically in the long run, it will cost the NZ company more to 
hedge than not hedge  But the NZ company are trading this 
statistically probable small capital loss for certainty.  The NZ 
company would rather know what the exchange rate would be 'for them', 
and concentrate on what they do best, running their own business 
business, rather than worry about estimating future exchange rates, 
and how that volatility might affect their business.  

That makes the whole thing more straightforward from the NZ company 
point of view.  

But who is 'the speculator'?  Is it just the bank?  And how 
does the speculator manage their own risk so that they won't be wiped 
out by an unexpected large turn in the market?   How does the New 
Zealand company know that the speculator *will* have enough cash to 
cover things if the market moves against the speculators position?   
Is it feasible that a New Zealand company will negotiate a currency 
hedging in good faith, yet not get the benefit because the speculator 
doesn't have enough cash to cover their position?

Would be interested in hearing from anyone who knows something about 
this topic.

SNOOPY


 
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