FX Hedging in
Volatile Times

Soyamba says that she’s seen some clients looking at alternative hedging solutions to absorb unprecedented costs. “You have treasurers who’ve been in the role for many years looking around the table, saying: ‘Okay, what can I do differently? Let’s talk about how we can manage one exposure to offset another exposure.’”

When the rand was stronger, some importers (or corporates who import in dollars) were looking for FX hedging solutions that offered protection against rand weakness in the forward. “But they also wanted instruments that would give them some level of participation, should the market strengthen further,” Soyamba says, “and they also didn’t want to be locked into traditional FX hedging. They’re looking for rates that outperform the normal FEC, so they’re open to a little more risk than an FEC would expose them to – provided there’s protection, of course.”

Hedging durations are different, too. “As the local pair (ZAR/USD) blew out, we saw exporters taking advantage of the move above the R16 mark,” Soyamba says. “The durations of their hedges were longer than we’d seen in previous months. Hedging solutions that allowed them to lock in value at enhanced rates, while at the same time giving them the opportunity to participate should the rand weaken in their favour at maturity, were popular.”

She adds that some treasurers have been deleveraging their debt books, where possible. “Where raising new debt is required, the theme has been to hedge fairly short (a two- or three-year duration), using interest rate option-based instruments,” she says.

When it comes to FX hedging during times like these, Soyamba recommends a balanced portfolio approach. “When you’re closer to the timelines of your cash flows, when you have a flexible hedging policy in place, and when you’re able to change the instruments you use as and when the market adjusts, that tends to work out better than when you set up how you’re going to be hedging for the long-term future,” she says. “The market is volatile. It’s constantly changing – as we’ve seen. A balanced portfolio approach, as opposed to hedging item by item, is the most prudent approach.”