The Polish currency market provides companies with access to so many currency risk management instruments that even an experienced investor may have difficulty choosing the right instrument. The fact that the right choice depends, in part, on accurate forecasts, further complicates the decision.
The Most Popular Instruments:
- Spot Transactions -Spot transactions are used to hedge current exchange rates. Companies that are in possession of a foreign currency may enter a spot transaction to exchange it for Polish zloty. The converted proceeds will be booked in the company’s account within two days. Conversely, having Polish zloty at its disposal, the company may, through a spot transaction, buy a foreign currency.
- Automatic Roll-Over of Spot Transactions -Companies using online trading platforms may automatically roll-over spot transactions. The advantage of this approach lies in the ability to lock in the current exchange rate, even if the payment date is undefined. This very flexible approach enables trading with resting orders to take advantage of exchange rate swings.
- Forward Transactions -Companies that have well-defined currency cash flows may limit currency risk through hedging an exchange rate in the future. Forward contracts secure a future exchange rate irrespective of subsequent market movements.
- Option Transactions -By transacting options, a company may effectively hedge against disadvantageous market movements, yet retain upside potential. Option transactions hedge the importer against higher exchange rates and may permit a positive return, if exchange rates move favorably. A Polish exporter who employs an option strategy will hedge against a stronger Polish zloty, yet retain upside potential from depreciation of the domestic currency.
- Cost-Free Option Transactions -If moderate currency swings have an inconsequential effect on your earnings, using an option strategy to hedge exchange rates within a range is a profitable strategy.