A simple majority

Asian currencies have strengthened; interest rates are forecast to rise over the next year. It’s the kind of environment where corporate treasurers might want to have a think over their hedging strategy.

For the most part, the region’s corporates like to keep it simple – plain vanilla swaps to hedge fixed/floating, maybe the odd forex option to lock in an exchange rate. A look at Hong Kong conglomerate Swire Pacific, for instance, shows the firm considers a vast array of risks, including interest rate, forex, maturity mismatching and funding. However, the firm prefers to take the plain vanilla route, only using options in very specific circumstances, such as when locking in an exchange rate during a bidding process (see page 37).

In Australia, meanwhile, a number of corporates, particularly those in the resource sector, were badly burnt when the Australian dollar fell to a record low of US$0.48 in April 2001. Those export-focused firms that had locked in at US$0.60 came under strong pressure from media and shareholders alike for racking up sizeable mark-to-market losses on their hedges. Since then, the Australian dollar has surged to US$0.75, but the resource sector has consolidated, acquired by global firms that report in US dollars. Others have restructured their hedge books to unwind complex option trades and to focus more on plain vanilla strategies. On page 32, Australian chemical and mining services provider Orica talks about its approach to risk management and how it has weathered the recent strength in the Australian dollar.

Nonetheless, while the majority of corporate treasurers favour plain vanilla strategies, there are some firms out there that are taking a leaf out of the book of the region’s investors, and incorporating market views to reduce the cost of funding. Some corporates, for instance, are more willing to incorporate views on the direction of interest rates and/or foreign exchange in order to subside the cost of swaps transactions (see page 30). Elsewhere, a handful of corporates have incorporated a credit derivatives element into cross-currency swaps in order to reduce their funding cost by 50–100 basis points (see page 28). These cost reduction strategies will never appeal to all corporates, but it demonstrates an increased comfort and familiarity with derivatives technology.