Implied volatility keeps firms cool in FX
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Foreign Exchange

Implied volatility keeps firms cool in FX

Corporates are taking a big punt on markets remaining relatively benign, given their apparent lack of confidence in existing FX technology and systems.

Illustration: iStock

A survey of UK-based CFOs published recently by MilltechFX found that corporates had relaxed their attitude to volatility risk over the last year. Just 70% are hedging their currency risk, compared with 89% in 2022, and there has also been a sizeable fall in the average hedge ratio.

The findings of Kyriba’s latest currency impact report, meanwhile, might suggest that corporate attitudes are reasonable, given a decline in quantified currency impacts and a fall in the average negative impact of currency movements for the first time since 2021 among the 1,200 multinationals covered by Kyriba’s report.

As long as key risk markets remain well behaved and investors continue to expect a soft landing in the US, volatility in FX will be subdued
David Leigh, Deutsche Bank

Many of the big FX banks are equally relaxed about the prospects of high market volatility in the short term, despite divergence in central bank rates policy.

Implied FX volatility has remained relatively low in the G7 currency pairs, despite heightened geopolitical risk since late summer 2022, which is surprising given the intraday volatility observed in other products, such as government bonds and equities.


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