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European corporates blindsided by FX volatility

Volatility in Q3 led to losses for Europe’s multinationals, report shows.

A large number of European multinational corporations have seen their profitability take a hit as a result of a recent surge in volatility in the foreign-exchange market, according to a report from risk-management technology provider FiREapps.

During the third quarter of 2017, 54 out of 350 Europe-based companies reported a negative impact on their earnings as a result of currency moves.

Of those, 26 quantified their impact, accounting for a collective loss of €3.63 billion ($4.27 billion). This was a sharp increase on previous quarters, with similar losses not seen since 2015.

Wolfgang Koester-160x186

Wolfgang Koester,

“FX tends to be quite cyclical in that volatility comes and goes in particular currency pairs,” says Wolfgang Koester, chief executive of FiREapps. “When markets are quiet, companies do hedge less and then when they get hurt they suddenly want to increase hedge ratios.

“We have seen that play out in the US over the past year, but European companies still appear to be largely under-hedged.”

Low levels of volatility have been a source of frustration for those alpha-seeking hedge funds and investors that seek to use FX as an investment asset class, but it has also resulted in a tendency among some corporates to under-hedge their exposure.

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