Understanding Your Effective FX Rate with the Achievable Rate
1. What is the "Achievable Rate" in foreign exchange (FX) hedging?
The achievable rate is the weighted average exchange rate you would get if you fully covered your underlying foreign currency exposure using existing FX contracts and a hypothetical ("phantom") trade. This hypothetical trade represents the additional amount needed to achieve 100% coverage of your exposure at the current market forward rate.
2. Why is the achievable rate important?
The achievable rate helps you understand the effective exchange rate you would lock in if you fully hedged your exposure today. It provides a clear picture of your overall hedging position and helps you make informed decisions about whether to adjust your hedging strategy.
3. How is the achievable rate calculated?
The achievable rate is calculated by combining:
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The weighted average rate of your existing FX contracts.
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A hypothetical trade that covers the remaining unhedged portion of your exposure at the current market forward rate.
This gives you a new weighted average rate that reflects full coverage of your exposure.
4. What is a "phantom" trade?
A phantom trade is a hypothetical FX contract used in the calculation of the achievable rate. It represents the additional amount needed to fully cover your exposure at the current market forward rate. It is not an actual trade but a tool to show what your overall rate would look like if you fully hedged your position.
5. How does the achievable rate change with new FX contracts?
When you add a new FX contract to your hedging strategy, the achievable rate updates to reflect the new weighted average rate of all your contracts, including the new one. This ensures you always have an up-to-date view of your effective exchange rate if you were to fully hedge your exposure.
6. What does "weighted average rate" mean?
The weighted average rate is the average exchange rate of all your FX contracts, adjusted for the size of each contract. Larger contracts have a greater impact on the average than smaller ones.
7. How does the achievable rate help me manage my FX risk?
By showing you the effective rate you would achieve if you fully hedged your exposure, the achievable rate helps you:
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Assess whether your current hedging strategy is meeting your goals.
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Decide whether to add new contracts to improve your overall rate.
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Understand the impact of market rate changes on your hedging position.
8. Can I see the achievable rate in real-time?
Yes, the achievable rate is dynamically calculated in the FX dashboard based on your existing contracts, the current market forward rate, and your underlying exposure. It updates as market conditions change or as you add new contracts.
9. What happens if I don’t fully hedge my exposure?
If you don’t fully hedge your exposure, the achievable rate will still show you the rate you could achieve if you did. This helps you understand the potential impact of leaving part of your exposure unhedged and whether it aligns with your risk tolerance.
10. How do I use the achievable rate to make decisions?
You can compare the achievable rate to your target rate or budget rate to determine if your current hedging strategy is on track. If the achievable rate is better than your target, you may be in a good position. If it’s worse, you might consider adjusting your strategy by adding new contracts or renegotiating existing ones.
By understanding the achievable rate, you can make more informed decisions about your FX hedging strategy and better manage your currency risk.
For any additional assistance or to learn more about CNS Treasury, please contact us at support@cnstreasury.com.