NEW YORK, Aug 28 (Reuters) – U.S. corporations are turning to foreign exchange options again to protect their cash flow as they fear the U.S. presidential election and diverging central bank interest-rate policies could spark a period of currency volatility, bankers said.
Currency swings, which can hike costs, disrupt cashflows and dent earnings, are far less pronounced than from 2020 to 2022, making option hedges cheaper than before. Prices soared during the COVID-19 pandemic and as central banks started hiking interest rates to tame inflation.
Ninety percent of U.S. companies surveyed in April by currency trading platform MillTechFX planned to buy more options. U.S. corporations hedged 48% of their currency exposure in the second quarter, up from 46% in the previous quarter, a MillTechFX survey of another 250 companies showed.
“As macroeconomic conditions evolve and potentially lead to increased currency volatility, (companies) are becoming more aware of the effects on their balance sheets,” said Nick Wood, head of execution at MillTechFX.
Options grant the right to buy or sell currencies at a predetermined rate, allowing companies to soften the impact of currency moves by locking in a worst-case exchange rate. They can still benefit if the currency rebounds.
Some bankers cited increased demand for option hedges, a sign that many companies are taking policy risks seriously, particularly the Nov. 5 election.
Democratic presidential nominee Vice President Kamala Harris’ plan for housing assistance and curbing price gouging could have mixed effects on inflation, the Tax Policy Center has said.
“The election has quite a wide dispersion of outcomes for foreign exchange in general, mainly around some of the policies around tariffs,” said Garth Appelt, head of foreign exchange and emerging markets derivatives at Mizuho Americas, noting a “big pick up” in options use.
“So, even though volatility is low, it is allowing corporates the ability to buy protection at a cheap rate on events that can be quite market moving.”
Implied volatility on an at-the-money options contract to buy or sell British pounds or euros versus U.S. dollars a year from now shows it is roughly 30% cheaper than two years ago, LSEG data showed.
Expectations of Fed easing knocked the dollar down to an eight-month low against a basket of currencies on Monday.
“We are seeing people layering into hedges,” said Kikis. “It shows me that corporates have not taken their eyes off the ball.”
Collars, a hedging strategy combining puts and calls, is getting more popular, said bankers. This enables companies to participate in any rise in a currency, unlike forwards where the exchange rate is fixed.
Companies are also using exotic options to structure strategies that cover their future cash flow in local currencies, said Appelt. These can be useful for protecting transactions such as mergers, and local investments with longer-term cash flows.
Paula Comings, head of FX sales at U.S. Bank, said her team has been helping companies dipping into options for the first time to secure board approvals, as well as others returning to the market after a long break. In one case, a client sought options in six different pairs after a years-long hiatus, she said.
“Political tension is higher, both domestically and internationally, and economic uncertainty has risen,” she added.
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Reporting by Laura Matthews; editing by Megan Davies, Michelle Price and Richard Chang
Our Standards: The Thomson Reuters Trust Principles.
