Derivative products leave them exposed to rapid surges in US$ and the yen
Reuters 31 October 2008
(HONG KONG) The extreme market volatility is snaring Asian companies caught on the wrong side of currency bets, highlighting what some say is a reluctance or inability of firms to properly protect themselves against such swings.
Companies across Asia have signed up for derivative products that have left them exposed to rapid surges in the US dollar and the yen, or a plunge in commodity prices and currencies linked to them. Damage from foreign exchange losses has piled higher at companies in South Korea and India. Commodity derivatives are also likely to claim more casualties.
Chinese companies last week announced hits from forex exposure, the biggest one coming from Beijing-backed conglomerate Citic Pacific which reported nearly US$2 billion of potential losses from unauthorised foreign exchange bets related to the Australian dollar.
Many Hong Kong companies also signed up for derivatives without proper hedging, according to another investment banking source. Whether financial officers failed to fully understand the contracts or whether they were knowingly speculating in an effort to maximise their profits is not yet clear.
What does seem clear is that few executives predicted how quickly the bets could go wrong, how much money they stood to lose, and how poorly defended they were against such a downfall.
‘Even if you understand the product, you’ve got to make certain that you have the solid risk management structure: the people, the system and, most importantly, the reporting,’ said Tom James, a UK-based energy risk management consultant and an author on hedging who has advised banks and trading companies for 20 years.
The surge in the yen has been identified as exposing a number of Japanese firms to potentially large derivative losses. Hefty falls in commodity prices from palm oil to copper and oil may be possible minefields for planters, miners and airlines.
Market sensitivity to the issue has grown since Citic Pacific’s announcement and even speculation of currency exposure has hit shares of other companies in the region. Hong Kong conglomerate Hutchison Whampoa said last week that it does not use any leveraged or structured foreign exchange products, after shares fell on concerns about its forex exposure.
Shares in Malaysian planter IOI Corp dived 20 per cent in one session last week on market talk about its exposure to big swings in the US dollar. In response, the company said it does not speculate on foreign currency moves.
Among the biggest currency decliners is the Korean won, which has fallen by a third against the US dollar this year. The drop has hammered small to medium-sized Korean companies that took part in common ‘knock in, knock out’ (KIKO) contracts. The contracts, popular among exporters, allow companies to sell US dollars with a fixed won-dollar rate if the won moves within a certain range.
If the won falls below the range, firms have to sell the dollar at a loss below the market’s won-dollar rate.
Earlier this year, several Indian companies took banks to court over foreign exchange derivatives that went sour. The problem continues though, as exemplified by software services firm Hexaware Technologies. Last week it saw a 57 per cent drop in net quarterly profit from losses relating to foreign exchange hedges.
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Bad Currency Bets Piling Up for Asian Firms
Derivative products leave them exposed to rapid surges in US$ and the yen
Reuters
31 October 2008
(HONG KONG) The extreme market volatility is snaring Asian companies caught on the wrong side of currency bets, highlighting what some say is a reluctance or inability of firms to properly protect themselves against such swings.
Companies across Asia have signed up for derivative products that have left them exposed to rapid surges in the US dollar and the yen, or a plunge in commodity prices and currencies linked to them. Damage from foreign exchange losses has piled higher at companies in South Korea and India. Commodity derivatives are also likely to claim more casualties.
Chinese companies last week announced hits from forex exposure, the biggest one coming from Beijing-backed conglomerate Citic Pacific which reported nearly US$2 billion of potential losses from unauthorised foreign exchange bets related to the Australian dollar.
Many Hong Kong companies also signed up for derivatives without proper hedging, according to another investment banking source. Whether financial officers failed to fully understand the contracts or whether they were knowingly speculating in an effort to maximise their profits is not yet clear.
What does seem clear is that few executives predicted how quickly the bets could go wrong, how much money they stood to lose, and how poorly defended they were against such a downfall.
‘Even if you understand the product, you’ve got to make certain that you have the solid risk management structure: the people, the system and, most importantly, the reporting,’ said Tom James, a UK-based energy risk management consultant and an author on hedging who has advised banks and trading companies for 20 years.
The surge in the yen has been identified as exposing a number of Japanese firms to potentially large derivative losses. Hefty falls in commodity prices from palm oil to copper and oil may be possible minefields for planters, miners and airlines.
Market sensitivity to the issue has grown since Citic Pacific’s announcement and even speculation of currency exposure has hit shares of other companies in the region. Hong Kong conglomerate Hutchison Whampoa said last week that it does not use any leveraged or structured foreign exchange products, after shares fell on concerns about its forex exposure.
Shares in Malaysian planter IOI Corp dived 20 per cent in one session last week on market talk about its exposure to big swings in the US dollar. In response, the company said it does not speculate on foreign currency moves.
Among the biggest currency decliners is the Korean won, which has fallen by a third against the US dollar this year. The drop has hammered small to medium-sized Korean companies that took part in common ‘knock in, knock out’ (KIKO) contracts. The contracts, popular among exporters, allow companies to sell US dollars with a fixed won-dollar rate if the won moves within a certain range.
If the won falls below the range, firms have to sell the dollar at a loss below the market’s won-dollar rate.
Earlier this year, several Indian companies took banks to court over foreign exchange derivatives that went sour. The problem continues though, as exemplified by software services firm Hexaware Technologies. Last week it saw a 57 per cent drop in net quarterly profit from losses relating to foreign exchange hedges.
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