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Managing Currency Volatility in Emerging Markets Phil Weisberg MD, Global Head of Foreign Exchange Thomson Reuters Eric Burroughs Editor FX Buzz, Reuters News Thomson Reuters Damian Glendinning Corporate Treasurer Lenovo Facilitator John Nicholas Research Director Treasury Today The Fragile Five EM real yields show vulnerabilities EM FX liquidity still problematic Paying vol premiums for protection Hedging Emerging Market Currencies - Increased Volatility and Challenges Damian Glendinning President, ACT(S) Singapore, 3rd December 2013 Treasurers and Regulations October 2013 6 Are Emerging Markets different? • Key requirements for a successful programme • Technical issues in some emerging markets Where is the real volatility? • Does not depend on EM/DM status Issues with new regulations • Could make emerging markets even more difficult Potential Solutions • Reduce the need for hedging? Conclusions December 2013 Hedging in Volatile Times 7 The principles of hedging are the same as for DM: • • • • • Need a clear understanding of the business How are currency variations passed on to customers – and when? Clear policy on what will be hedged – do not invent as you go along Educate management – for them, currency risk is not symmetrical! EM currencies are not necessarily more volatile Differences for EM: • • • • • December 2013 Often have exchange controls This can lead to using NDFs Result: lower liquidity, significant basis risk vs spot settlement Can be difficult to predict when payment will be made Cost is frequently higher BUT NOT ALL EMERGNG MARKETS ARE THE SAME ! Hedging in Volatile Times 8 1.5000 Currencies, Nov 2010 = Base 100 1.4000 1.3000 EUR 1.2000 JPY BRL PHP 1.1000 IDR INR THB 1.0000 0.9000 0.8000 December 2013 Volatility is not necessarily linked to EM status! Hedging in Volatile Times 9 Possibly, increased cost for all hedging activities • Regulations not yet certain • Different rules in different countries Major issues for NDFs: • • • • Will be centrally cleared – reduces liquidity and possibly size Will be very difficult to fully match trades Volcker rule will prevent banks from providing unmatched positions Issues with finding benchmarks – LIBOR etc Alternative onshore markets • Often very illiquid • Have constraints on delivery dates, documentation etc Some currencies cannot be hedged: VEF, ARS December 2013 Hedging in Volatile Times 10 Clear policy is essential • Decide percentages to hedge • Evaluate cost of hedging versus risk • Make sure management understands the trade-offs Currencies which are expensive to hedge: • Explore local borrowing or factoring to expedite settlement • If amounts cannot be remitted, consider capitalisation • Explore local manufacturing to create offsetting exposures To avoid: • Doing business in home currency, to avoid FX risk • It comes back in the form of a credit exposure DON’T WAIT FOR THE CRISIS TO PREPARE! December 2013 Hedging in Volatile Times 11 Currency risk has to be managed • A policy is required The solutions vary • They depend on the business – and the currency being hedged The policies must be in place before a crisis occurs! The new financial regulations will cause problems • For all currencies, but even more for EM hedging via NDFs It may be necessary to consider different alternatives …. And don’t forget to communicate: • Currency gains come from good management by the business • Currency losses are the fault of the treasurer December 2013 Hedging in Volatile Times 12 Managing Currency Volatility in Emerging Markets QUESTIONS Thank you all for your participation This webinar will be available shortly at www.treasurytoday.com