Wild swings in global currencies hammered corporate earnings in the past year, and while forex markets have gotten less choppy, some companies are seeking ways to guard profits and lower hedging costs.
The dollar is down more than 7% against a basket of currencies over the last three months, after rising to a 20-year high in 2022. This may be welcome news for companies looking to regain some of last year's losses, but "volatility remains especially concerning as organizations finalize year-end reporting and prepare guidance for 2023," Gage said.
As the Federal Reserve aggressively hiked U.S. rates, forward points have increased across many currency pairs containing USD, said Amol Dhargalkar, managing partner and chairman at Chatham Financial. Some companies are using options to protect against losses caused by exchange rates. This could mean they will benefit if currency fluctuations work in their favor.
Options have their own drawbacks, sources said. Volatility has increased the costs of using options to hedge, creating one hindrance to wider adoption, said Dhargalkar. For instance, implied volatility on a six-months at-the-money EUR/USD option in early December was around 9% versus 6% a year ago, according to Refinitiv data, meaning companies were paying more for the rights that options provide.
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