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CPA Foreign Exchange Collars - YouTube
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a collar is an arrangement whereby two
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options a cap and a floor are combined
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to hedge an exposure
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a caller doesn't necessarily lock a rate
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in place but it limits the downside risk
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from unfavorable movements and restricts
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the benefit that can be obtained from
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the favorable movements
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for an exporter an option can be used to
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protect against rising exchange rates
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the exporter would purchase a foreign
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exchange call option or cap this
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requires exporter to pay a premium to
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the seller of the cup to reduce the cost
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of this hedging strategy the exporter
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could create a caller by simultaneously
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selling a put option or floor this means
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that the exporter would receive a
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premium from the buyer of the floor
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the aim is typically to structure the
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caller such that the premium paid for
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the bot cap is offset by the premium
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received on the sold floor and thus
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creating what we call a zero cost caller
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consider an exporter that will receive a
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million us dollars from sales in three
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months time to convert these funds the
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exporter must buy australian dollars and
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sell a million us dollars assume the
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current australian to u.s port rate is
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0.75 if the value of the australian
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dollar rises against the us dollar then
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it will receive less australian dollars
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as can be noted at the spot price of
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0.75 the 1 million us dollars has a
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value of 1 million three hundred and
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thirty three thousand three hundred and
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thirty three australian dollars in order
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to hedge the foreign exchange exposure
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the exporter can structure a zero cost
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caller the exporter could buy an
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australian dollar call option with a
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strike rate of 0.76 and sell an
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australian dollar put option with a
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strike rate of 0.74 both with expiry in
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three months time
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under this scholar arrangement the
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exporter's purchase of australian
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dollars and sell of us dollars in three
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months time is hedged and the actual
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transaction price will be between 0.74
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and 0.76 the exporter can protect itself
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from unfavorable rate movements up to
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the strike rate of the boat cap being
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0.76
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above this level the exporter can
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exercise the option and buy at the lower
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strike rate of 0.76
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the exposure can also benefit from
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favorable rate movements but only down
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to the strike rate of the sold floor
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being 0.74 below this level the exporter
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now has an obligation to buy at the
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higher strike rate of 0.74
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at expiry if the exchange rate is
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between 0.74 and 0.76 both options
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expire worthless and the exporter simply
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undertakes the fx transaction in the
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spot market at the prevailing rate
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for an importer an option can be used to
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protect against falling exchange rates
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to protect against this exposure an
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importer could structure the reverse
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caller arrangement
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the importer would purchase a foreign
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exchange put option and simultaneously
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sell a call option the respective strike
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rates would be set such that the two
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premiums offset each other creating a
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zero cost caller
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consider an importer that plans to
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purchase a million us dollars of goods
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in two months time
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to make this payment it must sell
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australian dollars and buy a million u.s
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dollars assume the current australian
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dollar to us dollar sport rate is 0.7 if
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the value of the australian dollar falls
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against the u.s dollars then it will
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cost more australian dollars in order to
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hedge the foreign exchange exposure the
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importer can structure a zero cost
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caller the importer could buy an
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australian dollar put option with a
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strike rate of 0.68 and sell an
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australian dollar call option with a
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strike rate of 0.72
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both with expiry in two months time
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under this scholar arrangement the
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importer sale of australian dollars and
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patches of us dollars in two months time
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is hedged and the actual transaction
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price will be between 0.68 and
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0.72
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the importer can protect itself from
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unfavorable rate movements down to the
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strike rate of the bot floor being 0.68
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below this level the importer can
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exercise the option and sell at the
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higher strike rate of 0.68
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the importer can also benefit from
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favorable rate movements but only up to
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the strike rate of the sold cap being
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0.72
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above this level the importer now has an
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obligation to sell at the lower strike
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rate of 0.72
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at expiry if the exchange rate is
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between 0.68 and 0.72
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both options expire worthless and the
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importer simply undertakes the fx
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transaction in the spot market at the
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prevailing rate
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to recap callers are arrangements that
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involve a combination of a cap and a
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floor to hedge an exposure limiting the
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downside as well as the upside for a
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small or zero cost
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