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TREASURY

Corporates hedge their bets as market volatility surges

Recent volatility has encouraged many corporates to switch out of longer tenor instruments to increase their ability to react to market movements.

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Photo: iStock

The sharp increase in the cost of options and forwards this year has had a notable impact on corporate hedging strategies. This has seen not only companies pulling back from hedging altogether, but also – perhaps more notably – a shift in the duration of the hedges taken out.

Many corporates are reverting to more straightforward linear hedging products such as forwards, which are more liquid and easier for chief financial officers (CFOs) to unwind should the market move against them. That is the view of Eric Huttman, chief executive of MillTechFX, who refers to a shift towards shorter tenors of FX forwards.

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Eric Huttman, MillTechFX

“Instead of locking in rates for 12 months or more, CFOs are increasingly using shorter-dated forwards with tenors below six months, which are then rolled at maturity to maintain the hedge,” he says.

Vedanta Hedging also has seen a sharp reduction in the duration of hedges, with options contracts that were previously taken out for 24 months now moving to an average of three to six months.

“This


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