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Shifting currency exposures create treasury dilemma

Hedging may look expensive for businesses that have seen their revenues cut heavily by Covid-19 prevention measures, but removing hedges for currencies to which they have limited exposure may prove even more so.


There have been a number of unwinds by European fashion retailers, according to Deutsche Bank

Many treasurers have found themselves with higher than expected hedge ratios as a consequence of reduced revenues caused by coronavirus restrictions.

Where corporate treasuries run anticipated cash-flow hedging programmes based on sales/costs forecasts, under normal circumstances they tend to be under-hedged to allow for forecast errors on these programmes. But given the unprecedented impact of coronavirus on the global economy, there will be cases of corporates that are over-hedged for their revised forecasts.

As with so many other aspects of the pandemic, the effects on treasury have been unevenly distributed.

Many businesses exporting from Europe were running small hedge ratios anyway due to low volatility and fairly high hedging costs.

Those forced to temporarily suspend production tend to see their cost base as stable from a long-term perspective and therefore treat any potential over-hedge more like a timing mismatch than an actual open position.


There have also been cases where there is an expectation of a ramp-up effect towards the end of the year, says Ole Matthiessen, head of cash management corporate banking at Deutsche Bank.

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