FX volatility, China drive companies to hedge more

By Gertrude Chavez-Dreyfuss

NEW YORK (BestGrowthStock) – U.S. corporations are stepping up efforts to protect against currency fluctuations due to fears of rising volatility, particularly as a Chinese revaluation grows more likely.

Industry players say the FX effect on earnings is less pronounced than in 2008, when companies were caught off-guard by a dollar rally as stock markets tanked.

More companies have made a conscious effort to hedge against sharp currency movements, because sudden gyrations in major crosses can eat away at a company’s bottom line. This year, the dollar is up 4 percent against the euro, reversing a downtrend in the greenback that lasted several years.

Dollar weakness has boosted revenue for U.S.-based multinationals, both by making products less expensive in foreign markets and because overseas sales become worth more when converted into dollars.

“One of the biggest concerns right now for corporate hedgers is volatility. The last year-and-a-half has been tumultuous,” said Wolfgang Koester, chief executive of FIREapps, a provider of FX hedging software in Scottsdale, Arizona.

Although one-month euro/dollar volatility has been subdued this year, trading around 10 percent, vols have crept higher to more than 11 percent from six months to as far out as three years, suggesting worry over a rapid directional move.


Speculation about a revaluation of China’s tightly managed yuan has been a growing source of unease for importers. Expectations for a revaluation have caused more companies to hedge against sharp currency movements.

Some analysts expect China to revalue the yuan over the next three months, perhaps with an initial move before a managed float, where daily movements are restricted.

Since July 2008, China’s central bank has kept the yuan at a virtual peg to the dollar in order to protect the country’s economy.

“It is just another cost pressure… we have got to consider when we (price) our products,” said Kevin Farr, chief financial officer at Mattel Inc. (MAT.O: ), which produces toys made in China, in an earnings call last week. He said that a 1 percent appreciation in the Chinese yuan has about a $5 million negative impact on Mattel’s costs of goods sold.

FIREapps’ Koester said the high volatility and potential event risk such as a Chinese revaluation have led more companies to hedge 95 percent of their exposure, higher than normal. “People are hedging as high as possible so that the net outcome is zero. They don’t want any gains or losses.”

Analysts say most corporations typically hedge 50 percent of their requirements via a series of forward contracts, staying exposed to the spot market for the other 50 percent. That could be risky in this market, especially if currencies move unfavorably.

David Pierce, director of business development at GPS Capital Markets in Salt Lake City, Utah, which advises corporate clients on managing FX exposure, said clients are more interested in an economic hedge on their yuan-denominated purchases by buying non-deliverable forwards.


Industry players said more corporations have hedged against the recent dollar surge, having learned their lesson in 2008 when the U.S. currency jumped nearly 6 percent.

“What a lot of people did in 2008 was they panicked and hedged everything for the next year because they didn’t want the market to go against them,” said Pierce.

“In the last year and a half, a lot of things happened, which destroyed people’s confidence in doing nothing and not having a good plan at managing their FX exposure.”

The dollar has climbed 6.6 percent against the euro this year.

“Typically, you would expect to see a (surge) like this in the dollar for several months” rather than in such a short period, said Dawnette Blake, FX manager at electronics testing equipment maker Agilent Technologies Inc. (A.N: ), She said the dollar’s gain has had little impact on Agilent’s bottom line so far.

In the quarter ending January 31, about 2 to 3 percent of Agilent’s revenues were due to foreign exchange gains since the dollar had fallen against a basket of major currencies, Adrian Dillon, Agilent’s chief financial officer, said in an earnings call in February.

Internet search leader Google (GOOG.O: ), which derives 53 percent of its revenue overseas, is one of a growing number of companies actively hedging its currency position. In the first quarter, Google saw a $10 million benefit from hedging.

The program was first rolled out in the third quarter of 2008, and instead of a negative $59 million impact on that quarter’s earnings, the company managed a $34 million benefit. Still, it isn’t meant to be a profit center.

“For us it is an insurance policy,” said Patrick Pichette, chief financial officer of Google, on the company’s first-quarter earnings conference call. “It is an insurance policy for high volatility, and specifically if the U.S. dollar strengthens dramatically.”

Stock Market Trading

(Editing by Leslie Adler)

FX volatility, China drive companies to hedge more