• Introduction to World First’s Hedging Service
• The Participating Forward
• The Protection Option
• The Convertible Forward
• The Risk Reversal
• Open an Account

Introduction to World First’s Hedging Service

If you are a business that imports or exports, you may be exposed to significant risk due to constant fluctuations in exchange rates. Using different currency tools there are three ways to manage your foreign exchange risk:

1) The first has is to wait until you need to make a foreign exchange transaction or payment and take the prevailing (spot) rate. As an importer, you are exposed to a falling exchange rate but you are able to benefit from a rising exchange rate. And the opposite applies for an exporter. This is an 'un-hedged' position.

2) The second is to fix the exchange rate with a forward contract. This enables you to price into your budget the exact cost of, or income from, the goods you were importing or exporting and protects you from adverse exchange rate moves. However, you are unable to benefit from any subsequent improvement in the rate which can result in an opportunity cost.

3) The third alternative is to use currency options that can be tailored to fit your exposure, currency forecast and risk level, that enable you to protect yourself from adverse rate movements and benefit from favourable rate movements.

Hedging strategies - how do they work?

There are a number of different strategies but generally they work in one of two ways:

1) They enable you to guarantee a worst case rate. This worst case rate will always be inferior to the actual forward contract rate. The difference between these two rates effectively 'pays' for you to be able to benefit from a favourable move in the rate which can be unlimited.

2) They provide protection by guaranteeing a worst case rate which can be higher or lower than the forward contract rate for which you pay an upfront cost (premium). This is similar to an insurance policy.

What products are available?

Although there are many currency option strategies that are frequently employed, we have chosen four of the most widely used to describe here:

1. The participating forward

2. The protection option

3 The convertible forward

4 The risk reversal

World First will only be providing general advice when speaking to clients unless you disclose your financial objectives and needs to us and specifically want us to advise you. In this situation, we will be providing you with personal advice and will provide you with a Statement of Advice.

World First Pty Ltd holds an Australian Financial Services Licence - Licence No: 331945 -under the Corporations Act 2001 which authorises it to provide financial services in relation to foreign exchange contracts, derivatives and non cash payments facilities to persons within Australia.