To Hedge, Or Not To Hedge: Marc Zaffran, Societe Generale

Table Of Contents

Global Finance: Describe FX trends for Central and Eastern Europe.

Zaffran: Higher volatility, both implied and actual, especially in so-called beta currencies like the Russian ruble and the Turkish lira, has been a key theme. As the carrying charge reached an all-time high in 2015 on these currencies, more and more clients were looking to hedge their FX risks. Concerns about whether the “floor peg” will hold between the Czech Republic’s koruna and the euro and other pegged or semi-pegged currencies, following moves in the Swiss franc against the euro in the first half of 2015, and in the Chinese yuan against the US dollar in the second half, have also been a big topic for corporates and financial institutions.  

GF: What are your clients’ main concerns in the CEE region?

Zaffran: Clients based in Central & Eastern Europe—Russia and Turkey and elsewhere—are mainly concerned with access to funding. As a major part of their funding is in “hard currency” (the dollar, the euro), hedging into their local currency can potentially cost them the full carry/interest rate differential. Historically, they did not hedge to save such carry. However, significant FX moves recently made the potential negative impact on their financial ratio clearer, as they often led to bigger credit spreads on their new financing. So corporate clients are increasingly favoring partial hedges to optimize the market impact of the carry, looking at the advantages of hedging as opposed to the potential future credit impact of not hedging.

GF: How can an FX provider address these demands?

Zaffran: Recent developments in Central Eastern Europe, Russia, and China and Brazil show how important emerging markets have become for financial institutions and corporates in today’s globally connected markets. By talking with our clients over time, we study their FX exposure and its impact on financial reporting We bring them full-fledged advisory solutions. We update our financial institutions on market developments and offer customized trade ideas via our personalized SG Market web portal.

GF: What is the next frontier?

Zaffran: New technologies will become increasingly important. We already provide corporates and financial institutions with a global e-market-making offering on multidealing platforms or a single-dealer platform. We offer other solutions to asset managers, hedge funds and corporates.