Corporates Need to Hedge FX Risk: MillTechFX
Posted by Colin Lambert. Last updated: October 20, 2022
The findings in the latest Kyriba currency impact report have been seized upon by MillTechFX as evidence that corporations need to pay more attention to their FX hedging – a regular theme for the platform since launch.
Pointing out that currency volatility has become one of the dominant macroeconomic trends of the year, with the dollar surging to 20 years highs while the pound and euro have slumped to 37 and 20-year lows respectively, Eric Huttman, CEO of MilltechFX says, “The pressure on corporates, a segment of the market that has traditionally struggled with FX risk management, is intensifying as they adapt to this new environment.
“During calmer times pre-Covid-19, some corporates moved towards more exotic products,” he adds. “Now they appear to be reverting back towards the more straightforward linear products such as forwards which are more liquid and easier for corporates to unwind should the market move against them.
Huttman also says the firm has seen a shift towards shorter tenors of FX forwards used for hedging. “Instead of locking in rates for 12 months or more, corporates are increasingly using more shorter dated forwards with tenors below six months which are then rolled at maturity to maintain the hedge,” he explains. “This helps to provide firms with more flexibility should they need to adjust their exposure.
“While there will always be some that don’t hedge their FX risk at all, those that haven’t are now considering do so given recent market volatility and negative currency impacts,” he adds. “Those corporates that already had formal hedging programmes in place are now increasing their hedge ratios to protect their bottom lines.”