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FOREIGN EXCHANGE

Treasury: Banks and corporates get back to basics

The impact of the wider financial crisis has forced firms and their corporate clients to re-examine the way they approach their foreign exchange business. A strong sense of realism bodes well for the market. Lee Oliver reports.

FOR MOST OF this decade, many corporates took it for granted that foreign exchange was a low-volatility product that was easy to hedge. That notion has been shattered. "The moves in the market over the past few months have resulted in many more corporates thinking about and trying to quantify their FX risks," says Rashid Hoosenally, global head of FX structuring at Deutsche Bank.

The rise in FX market volatility has served as a rude reminder to corporates with currency exposure of the wisdom of prudently managing FX risk. Companies in Brazil, South Korea, Poland and Mexico have seriously mismanaged FX exposures and reported huge losses as a result. This was either through their own incompetence or, more worryingly, because they were ill-advised on hedging by banks.

Hoosenally says: "Many of the problems [corporate losses] we’ve seen have not resulted from the fact that the instruments they’ve used were necessarily inappropriate, it’s that the quantification of their risk has turned out to be inaccurate. In some cases that has created a mismatch between the underlying exposure and the hedges."

Hoosenally argues that corporates have been hit by an increase in FX market volatility coinciding with a severe economic turndown.