Positive Cash Flow

 

Option One

  • The Company Imports Goods

    Work with contractors carried out in 9 months contracts for 700,000 US dollars, valid about 60 days under the scheme of payment of the goods at the time of shipment to the port. The company is aware of this contract for the 3 months prior to payment.

    As a result, we have a situation where at the beginning of each month, the company enters into contracts with suppliers for the purchase of goods and payment is made only after 60 days. When such a situation arises, the company currency risk that in 60 days the US dollar may strengthen, and will have to convert more rubles for the same amount of dollars. Thus, in the case of a negative effect of foreign currency exchange losses get to his balance.
    Considering the above situation, the company set a goal to minimize losses from possible currency risk.

    Conducted an audit of currency transactions of the company, the results of which has been developed individual hedging strategy for a period of 12 months. Following the results of the development and implementation of the strategy of the company managed to reduce its foreign exchange risks and gain additional positive cash flow from the use of derivative strategies. As a result, the company began to receive foreign exchange gain, regardless of the dynamics of the US dollar

    Consider the hedging strategy of the company in detail. The added value in this case was created by the following factors:

    Fixing the exchange rate of adverse changes in the framework of the established corridor with the help of a financial instrument «Bull Call Spread + Put»
    Positive cash flow from the financial instrument «Bull Call Spread + Put»

    Consider each item and the results of its application in more detail.

 

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  • Fixing

    Fixing the exchange rate of adverse changes in the framework of the established corridor with the help of a financial instrument «Bull Call Spread + Put»

  • Strategy

    The

    Strategy was developed based on a combination of options, or strategy «Bull Call Spread + Put». Strategy «Bull Call Spread + Put» — this is optional combination that allows you to set the currency corridor safety and create a positive cash flow in the direction of the company.

    Currency safety corridor is a lower and upper boundaries of conversion of the US dollar, which are above the current spot rate of the US dollar. In strengthening the dollar falls within a safe passage. And while the dollar is in this corridor, the exchange rate for the company is at the lower limit. If the dollar is weakening, the company changes the currency market.

    Currency safety corridor is set so that the probability of the US dollar beyond the upper limit was a statistical error, or less than 5%. Thus, the US dollar breaks the upper limit «Bull Call Spread + Put» Only in the case of a very serious economic changes. If the exchange rate breaks through the upper limit «Bull Call Spread + Put», the company buys a currency at the new market rate adjusted for the spread security corridor.
    For example, for the company’s trading band for the first 8 security contracts was set at 31.35 — 33.20 (spread 1.85) at the spot of the US dollar 31.17, which implies that:

    • With the weakening of the dollar below 31.35, the Company buys US dollars at the exchange rate of 31.35.
    • When finding the dollar within 31.35 — 33.20, the Company buys US dollars at the exchange rate of 31.35.
    • When finding the dollar within 33.20 — 35.05, the Company buys US dollars at the exchange rate of 33.20.

    In strengthening of the dollar above 35.05 (the probability of this is less than 5%), the Company buys US dollars at the market rate minus a spread in 1.85 rubles.

    The strategy «Bull Call Spread + Put» purchase of financial instruments is made in relation to the date of fulfillment of obligations under contracts and hedging transactions are recognized in accordance with the legislation of the Russian Federation.

    Fixing the exchange rate of adverse changes in the financial instrument using «Collar»

    Strategy «Plus Collar» — this is optional combination that allows you to clearly indicate the currency corridor and create a positive cash flow in the direction of the company. Exchange rate corridor determined based on the pricing policies of the company so that the change of course in the framework of the exchange rate band for the company were immaterial.​​

    If the exchange rate breaks through the upper limit of the «Plus Collar», the company buys a currency at the upper end. If the exchange rate breaks through the lower boundary of «Plus Collar», the company buys a currency at the lower end. If the exchange rate fluctuates within the boundaries of «Plus Collar», the company buys a currency at the market rate.

    Using the strategy «Plus Collar» the purchase of financial instruments is made in relation to the date of fulfillment of obligations under the contract (20% down and 80% of the final payment) and hedging activities are implemented in accordance with the legislation of the Russian Federation.

    As a result, the company is fully insured themselves against adverse changes in exchange rates, which solved the problem of fixing the exchange rate within the currency band.

  • Positive cash flow from the use of «Plus Collar»

    One of the objectives of the strategy «Plus Collar» is to create a positive cash flow. «Plus Collar» — optional combination occurs when buying one option and selling another option. When buying an option, we pay a premium on the sale of an option we get a prize. Company has developed a combination in which the options were bought OTM (options out of the money) and sell options ATM (options at the money money).

    Award for ATM options more than the premium for options OTM, that allows you to create a positive cash flow in the direction of the company that created this«Plus Collar». Below are the cash flows on the basis of the application of the interbank «Plus Collar» for the company.
    The use of the «Plus Collar» strategy during the first 9 months generated revenue of $ 8,281,280 rubles.

    Exchange at the most favorable rate

    Additionally Lightbank revealed the difference between the exchange rate, which the company has received from its bank and a favorable exchange rate, which offers Lightbank. The difference was 0.36 ruble each currency transaction.
    Thus, for the first 9 months of lost profits from inefficient quotations would have been 12,960,000 rubles. Favorable rate conversion will reduce the loss of the company for the amount of 12,960,000 rubles.

  • Findings

    The use of a currency hedging strategy has allowed the company to achieve it’ goals in minimizing exposure and receive an additional 12,960,000 Rubles from a more effevtive exchange rate and 8,281,280 Rubles from the use of the strategy  of «Plus Collar»