FX Supplement 2014 | Corporate Hedging
TURNING TO OPTIONS
Although corporate treasuries have traditionally employed products like forwards, spots and swaps to hedge their foreign exchange exposure, Iyengar notes an increasing interest in options. “We are seeing a pickup in companies trying to get budget for option products in the last couple of quarters,” he says.
Options “are primarily used from an insurance perspective on extreme moves in the market at some time in the future,” says Iyengar, explaining that there is increasing interest in option structures because companies view them as cheap, based on historical comparisons, while sensing a future rise in volatility.
Schamotta also cites increased use of currency options. In particular, he says, companies worried about extreme market moves in the wake of the 2008 financial crisis are using options to implement currency collars, a structure in which a company buys a put option while selling a call option. A collar limits the company’s gain if the market goes in its favor and limits its loss if the market goes against it. “If the markets go really crazy, you are protected,” says Schamotta.
The biggest driver in hedging foreign exchange risk at the moment is actually regulation.
Association of Corporate Treasurers
Iyengar says that companies using a collar “would typically be buying insurance on rates moving in one direction and financing that premium by selling the counterparty an option that, if rates went below a certain point, the company would pay the counterparty.”
“The company wouldn’t care if rates went down because they would pay their suppliers less,” he adds. “The benefit they would gain by paying their suppliers less would make up for the payment to the counterparty.”
Companies are also starting to employ a portfolio approach to forex hedging, according to Iyengar. “Rather than looking at each currency pair discretely, they’re looking at their entire exposure on a portfolio basis, looking at which currencies are highly correlated or inversely correlated, and isolating the net risk on a portfolio basis,” he says, explaining that the approach involves the use of more sophisticated models. “Once they’ve isolated their risk, they can then make certain decisions on how to hedge that risk.”
FOREIGN EXCHANGE SUPPLEMENT 2014 | SECTIONS