Did the subprime crisis affect the hedging market?
- What is forecasting?
- Different techniques of forecasting
- Market based forecasting
- What is hedging?
- Why use it?
- Deferent techniques of hedging
The aim of this paper is to analyze if the financial crisis has changed the use of hedging techniques. Forecasting is the process of estimation of unknown situations. Forecasting is use to estimate a risk. It can be exchange rates risks, economic exposure, translation exposure, etc. In this chapter I'll expose some forecasting techniques related to the exchange rate or transaction exposure. The technical forecasting involves the use of historical rate data and with this data, to predict the future exchange rate. This technique is very popular because of the ease of use. However, this technique can be criticized because the future exchange rate doesn't depend on the past but on the future events and information. But speculators use it in order to capitalize on the day-to-day exchange rates.
[...] But the action of the speculators will in itself increase the demand of the currency and put the exchanges rates higher. Forward rates: This technique provides a future spot rate in by example 30 days. It is used for preparing contracts now that will be paid in one or three months. Hedging Like I said before there are three major exposures to the exchange rate fluctuations. I'll focus on the transaction exposure and the ways of hedging this kind of exposures. A transaction exposure is characterised by an anticipated future cash transactions that can be affected by exchange rate fluctuations. [...]
[...] But like for the call option you aren't oblige to use the option. So you avoid the risk without scarifying the possible profit. Effects of the subprime crisis on the use of hedging The sub primes crisis is related to the global depreciation of the American estate market and the impossibility for the Americans to pay their loan back. As a result a lot of banks had to recalculate the value of the houses they had financed. They had to act depreciations of their assets. [...]