Hedging for students

Hedging Europe Finance

Europe Finance (est. 2008) is the first and the only one company in Russia which develops and promotes financial products of absolute profitability, combining best practices and tools of world’s leading hedge funds.

Europe Finance Products and Services Financial Engineering

- Financial flows optimization - Loan Interest Rate reduction

Market Risk Hedging - Currency risk - Commodity risk - Float Interest Rate risk

Hedge Funds Development and Support

Our Best Clients

Our Key Partners

Europe Finance Solutions

Computational Finance collect all advantages of classic hedging instruments and are oriented exclusively on solution of individual business tasks. Nowadays Europe Finance is actively using around 150 variants of Active Derivative Strategies.

Unique experience of hedge-funds and world leading treasury departments

Detailed business analysis

Strategy creation without speculative operations

Individual consultations and personal derivative experts

Wide range of banks partner

Better exchange rate and OTC instrument prices

Financial Engineering

Market Risks Hedging

Decreasing Interest Rates

Positive Cash Flow Creation

Free Cash Flow Management

Wall Street

What is this all

About?

How can it Benefit?

Market makers

Market makers and political games create a lot of unmanaged risks

Does it Matter?

Currency and commodity risks have significant impact on business

Currency risk example

Interest rate risk example

Real example - Oil crisis

Oil Price

Summer, 2008. Oil peak price $147

Spring, 2009. Fall down to $40

$5.2 billion losses in 2008

• Hard to forecast financial flows • Market losses

450 jets grounded 25,000 employees discharged

100+ jets 5,500+ employees



50+ jets 500+ employees



Results

The on profitable company during the period 14 jets launched

Risk management

Hedging is a financial risk management technic that reduces unfavorable outcome of market changes. E.g. currency and commodity risks

Is Hedging Useless?

Rod Eddington, CEO British Airways

“Hedging doesn’t make real value in long term perspective due to associated costs. We consider hedging not efficient.”

Useless?

Ignoring of hedging resulted for British Airways in:

7,260 canceled flights

£564,000,000 losses

We are hedging…

“If we don’t hedge jet fuel price risk, we are speculating. It is our fiduciary duty to try and hedge this risk”

Scott Topping, CFO Southwest Airlines

Oil crisis results

75 jets grounded 6000 employees discharged





14 jets launched 800 employees hired

Southwest Airlines results

14 Jets launched

800 employees hired

Net Profit increased in 33%

Hedging

Independence from rate

oscillations

Accurate financial flows

forecasting

Saving money under

unfavorable conditions

Better financial conditions

Hedging Instruments

Futures/Forward: liability insurance

Option: right of choice

Combination:

individual solution

Hedging instruments

Forward/Futures: liability insurance

Option: right of choice

Allow to reduce risks when negative market situation

Futures/Forward is almost free

instrument

Can’t provide with advantages when positive market situation

Allow to reduce risks when negative market situation Allow to create advantages when positive market situation Costs a lot of money

Active Hedging Strategies

Active Hedging Strategies – risk-free, non-speculative strategies with the only advantages of classic hedging instruments:

Allow to reduce risks when negative market situation

Futures/Forward is almost free

instrument

Can’t provide with advantages when positive market situation

Allow to reduce risks when negative market situation Allow to create advantages when positive market situation Costs a lot of money

As a result you receive costs-free instrument that provide you with possibility of using negative and positive market situation with maximum advantages for your business

Hedging Strategies

Passive Active

The strategy allows to fix an exchange rate that fits your business, guaranteeing total

currency risk protection

The strategy allows to fix the exchange rate as well as open

opportunity for profiting from favorable market

conditions

Example

100% currency risk protection. Opposite to passive hedging, active hedging allows to profit from positive market conditions

€/Р

39.2000

39.4000

39.6000

39.8000

40.0000

40.2000

40.4000

40.6000

40.8000

0,4 RUR

option strike

forward close

forward purchase

right to decline the contract

The strategy would save 1 455 000 RUR for 300 000 EUR contract

Innovative approach

Use innovative approach to be more successful and secured

Thank you!

Hedging for students

Economy & Finance

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