Despite the fact that the foreign exchange forward is the most widely used derivative instrument amongst corporate hedgers, some experts are now questioning the effectiveness of utilizing forwards when it comes down to hedging emerging market currencies.
In this video blog, Numerix FX expert Udi Sela discusses this issue as highlighted in the recently published Treasury Today article, “FX Forwards: the Wrong Option for EM Currencies."
Udi also elaborates on what might be most effective options strategy in today's global economic environment, and his outlook for emerging market currencies generally.
Jim Jockle (Host): Hi, welcome to the Numerix Video Blog your expert source for derivative trends and topics. I’m your host, Jim Jockle. Joining us today is resident trading strategist and FX expert for Numerix, Udi Sela, Udi how are you?
Udi Sela (Guest): Thank you, Jim. All well.
Jockle: Well thank you for joining us as always. As discussed in a recent story published in Treasury Today titled, “FX Forwards: the Wrong Option for EM Currencies,” though the foreign exchange forward is the most widely used derivative instrument amongst corporate hedgers, some experts are now questioning the effectiveness of utilizing forwards when it comes to hedging emerging market currencies.
So Udi, as debated in the article, is this more a case of the instrument being deployed at the wrong time, or is there a broader discussion about using FX forwards as a tool to mitigate FX exposures?
Sela: It’s a few things actually, Jim. The first thing is indeed timing. And if you take an example of Russia, let’s say you have receivables in Russian Rubles that you had to convert into dollars, had you converted them in mid-January you probably would’ve locked the highest rate ever and had locked a loss. That’s one part.
The second part is really about using forwards as opposed to not hedging at all, being exposed all the way up. Or, using derivatives such as options where you can hedge the worst case, while participating in any favorable market move.