RISK MANAGEMENT | 18 AUGUST 2022

FX Hedging in
Volatile Times

Absa-CIB-Author

Bulelwa Soyamba

Director of Structured Sales,
Absa Group

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As the rand continues to fall and recover, then fall and recover, against the US dollar, how should corporate treasurers mitigate their risks?

If you’re a corporate treasurer, it’s hard to look at the fluctuating fortunes of the rand and not simply put your head in your hands. The South African currency started 2022 just below R16 to the greenback, before recovering to about R14.60 in March, then weakening past R16 in May, bouncing back to R15.50 in June and collapsing past R17.00 in July. It was a similar story in 2021, and in 2020.

“The past two years have really changed the way treasurers manage their foreign exchange [forex, or FX)] exposure,” says Bulelwa Soyamba, Director of Structured Sales at Absa Group. “The focus has shifted to a more holistic and dynamic hedge approach at a portfolio level, as opposed to the traditional siloed approach, which solely focused on hedging each asset class independently.”

Absorbing costs through FX gains

Soyamba says that in during the first quarter of 2022, importers were seen looking for further yield enhancement to improve their average hedge rate for the period. Many of them used initial FX gains as an alternative tool to absorb the impact of rising shipping costs.

“Given the fierce nature of the competitive landscape, it is increasingly impossible for importers to pass the fuel cost impact on to their clients,” she explains. FX hedging solutions that offered full protection against rand weakness while allowing some level of participation, as well as conversion rates that outperform prevailing forward rates, were both popular.

“They needed a rate that outperformed their forward exchange contracts [FECs],” she adds. “They needed to improve their hedge rate for the period, because they were also trying to absorb the shocks of other costs that had not come down since the onset of the pandemic. So as much as it was cheaper for them to buy US dollars, they were also using FX gains to end the year slightly better, and to offset their other losses.”

Beyond traditional FX hedging solutions

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.”

Absa-CIB-Author
Bulelwa Soyamba

Director of Structured Sales, Absa Group

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