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Hi JM,
Could you kindly explain what are synthetic foreign exchange agreements? If no currency is delivered, how is this hedging?? I don’t think I quite grasp this ‘notional’ concept.
Thanks
It ends up having the same effect as a forward rate.
However, instead of fixing a forward rate, the transaction itself is converted at whatever the spot rate turns out to be (so maybe it is better for us, maybe it is worse).
At the same time though, you have agreed with another party an arrangement where we fix a rate between ourselves and agree that depending on which way the spot rate moves one of us pays the other the difference.
(So if spot moves to that we are losing on the transaction, on this other agreement we ‘win’. On the other hand, if spot moves to we are gaining on the transaction, then on this other agreement we will ‘lose’.)
The end result is just as though we had a forward rate.
(These are used in countries where forward rates are not allowed)
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