Well, hopefully anyway. Remember I was talking about my P/L some time back, since then I have been cracking my head everyday, exploring all possibilities but not the stock dividends one though I have been thinking of that for some time.
Stock dividends come at 0 so they have no notional. But that doesn't mean they don't have a local currency balance. But we hedge them based on notional. Anyway to cut a long story short, I worked out my theory on a spreadsheet and presented my case to my manager. At first she tried to argue her way and I presented mine. Her idea is based on no notional.
Notional = stock cost x quantity = 0 so doesn't change notional amount hedged originally on the original stocks acquired at a cost.
But my idea is based on TWD balances.
Balance = stock quantity x close-out price (since they came in at 0) = realized TWD balance.
But the things is we won't know the TWD amount to sell out until it becomes realized.
The swap hedge is in USD and is fixed at a certain FX rate on close out. The TWD balance is still being revalued everyday. As we have been getting more stock dividends, the FX impact is great, especially since the TWD has weakened significantly in the last couple of months.
I proposed the idea of the swaps having a FX fixing gain or loss, which we are not taking into account in our reconciliation.
Anyway, she seemed to buy my story at least for now cos I actually justified and substantiated my break with workings and the argument presented above.
Damn... FX can be so easy, but can also complicate matters. I know my arguments seem straightforward but trust me, it is not so when you are in it. It took me a couple of months just to come up with this simple theory, which I hope with all my heart is not wrong.
By the way, she just told me I need to have another year-end review with her and set my goals again... And I am supposed to outline my achievements.
To have a very happy Christmas for 2005.
