If a PE firm is exploring an investment in a high quality project but in a country with substantial currency volatility, how do they typically hedge such risk? What kind instruments do they use? Can they just purchase an option from local financial institutions to purchase USD at a fixed rate over the next few years? Where can I read up more on this?
There's a general understanding that the country's currency will lose value over time.
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goes both ways - hedging can be very expensive. i had a prior internship in EM PE and for some deals we'd hedge and some we'd just go in naked - currency movements will then become a point of analysis in your periodic investment reviews
Currency hedging for certain EM currencies can be very expensive, one way to deal with it is to assess the full impact of fluctuations on the project and its returns and then price the offer accordingly (e.g. aim for a USD IRR assuming a certain annual depreciation)
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