Currency Risk Sharing

A French company is selling 4,000 cases of pretentious wine to a Russian buyer. The wine is delivered monthly and the relative currency prices are set each month, i.e. whatever they are on the last day of that month is how much the Russians owe the French.

But the French are nervous sellers and they want more certainty in their financial lives. They still "hear the people sing." So they want to share in the risk of currency fluxuations.

The "hedge" here is that a basic price is set at the signing of the deal, and in this case, the French and Russians agree that whatever changes happen, they'll only take half of that change over the life of the contract, thus sharing in the risk of, say, the Russians devaluing the ruble and the French being screwed fully, 15 months into the contract.

If it took 1,000 rubles to buy one euro, and suddenly the ruble-to-euro ratio doubled after a devaluation, then at 2,000 rubles to buy one euro, for the purposes of this contract to buy French wine, the French would be getting 1,500 rubles to the euro, thus not fully going bust delivering wine at this steep discount to the relative rates they thought they were getting when they signed the deal.