Hedging foreign exchange risk in SME in the Czech Republic

Abstract

The paper is focused on hedging foreign exchange risk, mostly in small and middle enterprises. Many companies are facing the problem of foreign exchange risk under the exigent circumstances of current financial crisis. The paper also provides analysis of current situation within Small and Middle Enterprises (SMEs) in the Czech Republic whether they are using financial derivates for hedging foreign exchange risk or not, and which ones. As a demonstration of one good hedging possibility, there is an example of real company and its data before and after using barrier options as the hedging instrument. The questioner survey was processed by basic statistical methods. This research outlines the issue of hedging, which could be either financially unattainable or much too difficult for many SMEs in the Czech Republic. The trend of CZK/EUR in 2012 gives opportunity for using financial derivates such as forwards, currency options and swaps to protect assets and liabilities against higher exchange rate volatility.