Exotic hedging options in the foreign economic activity: comparative analysis

The paper analyses the situation when Russian exporter receives his/her proceeds from abroad and wants to have them converted at the most favorable exchange rate in three month. There are some hedging options available to the exporter such as - a simple option (ordinary put) or a number of exotic forms including a barrier option, Asia one or a lookback option. The calculations of the option premiums made through mathematical models show that with a declining dollar exchange rate over the first quarter of 2003, an ordinary put premium was equal to zero, and therefore it was unlikely to be executed. A lookback option proved to be a single instrument allowing the opportunity to sell at the maximum possible exchange rate. The option was executed in the first quarter of 2003 because it was the same as initial one, and the exporter gained. In the first quarter of 2005, the dollar’s exchange rate varied more drastically because of the higher volatile exchange rate. Although the lookback put was profitable to the exporter, it would be more advisable for the exporter to use the barrier options. Which of four barrier options is being executed depends on whether the investor’s expectations coincide with the dynamics of the dollar’s exchange rate. The paper also describes the case where the investor’s expectations and the up-and-in put conditions coincide