Neutralization of currency risk via financial transactions

The Risk Insurance Practice

In the modern environment, the absence of practices to insure against risk may affect the company's financial results in the event of unfavorable exchange rate dynamics. Currency risks are faced by:

• Exporters who receive income in foreign currency and sell currency earnings to finance the costs denominated in RUB.
• Companies with revenues in RUB and which import goods and services in foreign currency as part of their production process.
• Companies with revenues and/or costs in RUB and which borrow in foreign currency in international capital markets to finance economic activity. 

Hedging is the neutralizing of the risk of asset price changes in the future by performing certain financial transactions. By hedging, companies can:

• Avoid financial losses due to adverse future exchange rate changes.
• Simplify the planning process of key financial indicators of economic activity by fixing the future value of the exchange rate. 

Thus, hedging eliminates or significantly limits currency risks secondary to the primary activity of the business, but which are very significant in terms of financial results. 

Main Hedging Instruments

• Deliverable Forward – purchase/sale transaction for a certain amount of one currency for another (including RUB) at a certain time in the future at a rate agreed upon at the time of the transaction.
• Estimated forward (NDF) – similar to a deliverable forward, with the difference that at the date of execution of this contract, the settlements between the parties occur only in the amount of the difference in the foreign exchange.
• Futures contracts on USD and the EUR for RUB on the Moscow Interbank Currency Exchange (MICEX) — standardized forward contracts that are non-deliverable (settlement) instruments.
• Option – purchase of the right to purchase (call) / sell (put) for a certain amount of one currency for another (including RUB) at a certain rate at a future date (European option) or at any time prior to the onset (American option).

Procedure for Transactions

If you are interested in forward and option contracts, you should:

• Sign a standard agreement with Sberbank to carry out futures transactions.
• Inform the appropriate department of Sberbank of your intention to enter into a forward exchange transaction and request a quote for this instrument.
• Decide whether to conclude the transaction based on this information.
• Conclude the futures transaction with Sberbank (if you are happy with the bank’s terms).

If you want to conduct operations with foreign currency futures contracts, please contact Sberbank Treasury and conclude the Standard Agreement on trade services in the Derivatives Market Section (Standard Contracts) of the Moscow Interbank Currency Exchange.