Gerliczy Tibor

Evaluation of foreign exchange hedging costs in Slovakia

Executive Summary

Slovakia decided to adopt EURO currency on January 1, 2009, thus giving up own currency and own monetary policy. This act represents an important change in Slovak economy. Therefore it is not surprising that such a decision stirs discussion about the effects and desirability of the adoption of the new European currency. Supporters of EURO often state savings from eliminated foreign exchange (FX) risk bound to EUR/SKK transactions as one of the important benefits of the EURO adoption. The goal of this paper is to quantify these savings and thus answer the question: Is the elimination of FX risk a significant benefit?

After applying three different approaches to evaluation of the benefit of elimination of FX risk, I can conclude that the savings represent 0.02% (NBS estimate) – 0.20% (my calculation) of GDP. When compared to:
• direct benefits - elimination of transaction costs, costs in accounting and administration, lower cost of capital AND
• indirect benefits - increase in international trade and increase in FDI (Foreign Direct Investment),
this factor seems to be less significant. Taking into consideration the characteristics of Slovak FX derivatives market (insufficient liquidity, high cost of derivatives) and practices of multinational companies (they usually hedge positions in their domestic market, which is usually more developed), I can conclude that the benefit of elimination of FX risk is not one of the most significant benefits of EURO adoption.

See the attached files for details. In case of any questions, please do not hesitate to contact me at ude.yeldarb.liam|yzcilregt#ude.yeldarb.liam|yzcilregt.

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