International Finance Hedging Strategies

Hedging using arbitrage has the desired effect mainly in cases of cross border finance and trading in more than one currency as the inefficiency in the pricing at the market is exploited by the method. In the case mentioned above, the fact that the interest rate is higher in case of the pound sterling, as well as the relatively higher premium earned from the dollars, justifies the advantages of this method.
Another hedging strategy that is widely used with respect to the foreign currency transactions in order to maximize the profits is that of Offsetting forward contract to accomplish risk aversion on the loss of revenue through an exchange. The process of offsetting forward contract predominantly involves the process of purchasing a specific foreign currency which will be of need to the company in the future for investment or payment of bills due in another form of currency. This argument by Patrick Cusatis and Martin Thomas (2005)i that the offsetting forward contract is not only a successful hedging strategy but also provides the flexibility of deploying the currency conveniently instead of undergoing more than one conversion from one currency to another.
The fact that the offsetting …
As the conversion of the US dollars expected to receive in the June 2006 in the case under discussion can also cater the payment for import in euros by October 2006, the conversion of the funds into euros straightaway is another option of hedging the funds.
The amount earned in Euros through the above method for US$12,000,000 has a discount of approximately 80cents leaving the company with approximately 9,942,858 euros. This makes it clear that the company meets only a part of the total 15,000,000 euros payment for imports through directly converting the US$ 12,000,000 into euros than Pound Sterling. Alongside the fact that the interest rate for Euros is considerably lower to that of pound sterling further makes it clear that the overall profit made by the organization in the offsetting of the US$ is not appreciable. Hence the hedging using arbitration strategy is recommended for the given case of Globalcom Plc.
From the given exchange rates for US Dollars and Euros in October 2006, the revenue of US$ 12,000,000 can cater to the same value of 6,857,143. Alongside, the exchange rates with respect to the euros and the conversion of the US Dollars to euros is more or less the same as discussed in the previous section under offsetting forward contract which did not lucrative. This makes it clear that the appropriate hedge position for the given situation is for the company to convert the US Dollars earned into Pounds Sterling in June 2006 and use the same with the interest accumulated to cater part of the import payment of 15,000,000 euros.&nbsp.