When I spoke to foreign exchange traders, one of the biggest topics this year was how to move forward as interest rates move to record levels due to central bank actions. FX Volatility remains subdued.
Traders attribute this to the coordinated nature of interest rate movements, with carry trades and relative value opportunities not opening up when all central banks raise rates at the same time. But now various countries are starting to experience pauses. we Things are changing, with the dollar showing strength.
3 Months at the Money EUR/we For example, dollar options have hovered at 8.76 volumes since the beginning of the year, dropping to a low of about 6.29 volumes on June 9, according to Bloomberg data. However, it has since increased and reached 7.52 as of October 9th.
for FX Option trading desks, this is great news. As you may remember from the years just before COVID-19, making money in a low-volume environment is not easy.However, it is even more expensive for corporations. FX Volatility is generally not something to celebrate because it can affect returns.
For example, when volatility peaked in the second quarter of 2022; we And European multinationals reported record revenues of $47 billion. FXrelated revenue headwinds; according to Research from financial technology company Kyriba.
Over the past year, companies have largely responded by modifying the types of hedging instruments they use, switching from long-term futures contracts to fixed interest rates of six months or less, with an average hedge period of five and a half months. This was revealed in the investigation. Chief Financial Officer of a North American Company (CFOs) Implemented by MillTechFX In May. Many businesses are able to take full advantage of the option to secure these rates at lower premiums.
CFOAccording to the survey, companies are also hedging more exposure to increase protection, with 79% of companies saying their hedge ratios have increased compared to last year.
However, the survey revealed that CFOCompanies are concerned about how their technology stacks can handle this increase in hedging activity.It showed almost a third CFOI felt for them. FX The stack is below average, with many companies citing difficulty in predicting exposure, calculating execution costs, and benchmarking providers as their biggest operational challenges.
Companies that are a little slower in their technology journey may rely heavily on manual price research processes, with multiple phone calls, emails, or having to log in to compare quotes from dealers. An online platform may be required.
But some companies are trying to change this, with gathering and using risk management analytics becoming a key focus for treasurers. For example, better data on a company’s cash flow and projections of future cash payments could provide better insight into what to hedge and when.
large dealer FX Franchisees are being asked to digitize these processes and develop a variety of tools, such as carry monitoring and currency risk scorecards, to help treasurers make decisions. FX program.
Some banks are breaking down silos within their internal systems to give businesses access to a single platform across the board. FX and financial management.
Banks that are able to offer better technology-driven solutions may be able to win more deals, which could give them pivot to a broader trading franchise and offset flows.
This could become even more important now that institutional capital flows have declined over the years.
