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The distant sale of fixed assets in foreign countries could be hedged by using long-term forward...

The distant sale of fixed assets in foreign countries could be hedged by using long-term forward contracts, especially with emerging market currencies

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Hedging distant sale of fixed assets in foreign currencies especially in emerging market countries

Before understanding how to hedge, it is important to know why it is necessary to hedge distant sale of fixed asset in foreign currencies. For example: If a US based MNC buys land in India for Rs.60M (USD/INR during purchase is Rs.60) which translates into $1M worth of fixed assets. If the company plans to sell the asset after 2 years, the asset may be worth Rs.70M but it is possible that USD/INR depreciated from 60 to 70 which translated into USD worth of $1M. In this case, though there was an appreciation in value of asset, it was fully nullified due to depreciation Indian rupee.
In such cases, companies can use forward contracts where they fix the price at which they want to buy USD/sell INR two years from now. This will enable the MNC to deal with FX swings.

jeff jeffy answered 2 years ago
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