Knock-on FX

Many banks are now including a credit charge in swap and forward transactions, while increased volatility has upped the cost of options. At the same time, the financial crisis has sparked a suspicion of complex products. How are corporate hedgers and their dealers balancing these issues? John Ferry reports

Hedging foreign exchange risk has become a more complicated and critical issue for corporate treasurers since the onset of the financial crisis. As both implied and realised volatility leapt following the collapse of Lehman Brothers in September 2008, many companies discovered the hedges they had put in place in more benign conditions were inadequate – and in many cases left them exposed to negative mark-to-market valuations and close to breaching internal value-at-risk limits.

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