From my understanding the equity hedge is to protect NTA from foreign currency fluctuations.
Say I put in $100 AUD at exchange US 85 cents I end up with US$85. At the end of the day, regardless of where the exchange rate goes I want to protect the initial equity of AUD $100. Therefore I hedge my currency and pay the appropriate fee.
If the US$ goes down, my investment goes up, but my hedge is out of the money. In a 100% hedge the amount the investment goes up will be offset by my hedge liability, meaning I should get my $100 back at maturity and transfer back to AUD excluding any revaluation (i.e. protecting my equity from currency fluctuation).
The converse is true if the $US goes up.
The problem is that the equity of centro is overhedged due to the write-downs suffered in the GFC. Therefore, when you had a falling AUD you did not get the corresponding increase in asset value to offset the equity hedge liability. Now the AUD is rising, there is an ability to offset the liability and closely align the hedge amount with the equity value (a really good positive). Naturally where the zero cost amount is only the skilled people at CER know.
Some people 100% hedge, some a lesser amount etc due to the risk profile and cost involved (as buying the derivative naturally costs).
I am by no means an expert here, but this is my understanding.
What is positive is that the FX hedge for income streams is around 69 cents from my knowledge, meaning that if income flows to Centro from the US a substantial foreign currency gain is achieved IMO.
Cheers
CER Price at posting:
20.5¢ Sentiment: None Disclosure: Not Held
