What’s going on here?
US companies are increasingly using currency options to Hedge against potential currency Volatility as the presidential election approaches and central bank policies change.
What does this mean?
With the U.S. presidential election looming, companies are bracing for potential market turmoil. Recent lower volatility has made FX options more affordable and enticed more companies to hedge their currency exposure. According to a MillTechFX survey, 90% of U.S. companies plan to increase their options purchases, with hedged exposure rising to 48% in the second quarter of 2024. Experts such as Nick Wood of MillTechFX and Garth Appelt of Mizuho Americas have observed a significant increase in options usage driven by awareness of macroeconomic impacts. For example, Deutsche Bank’s currency VIX has fallen from 13.67 in 2022 to 7.68, underscoring lower volatility at present. However, significant moves such as the Bank of Japan’s recent rate hike remind companies of currency risks and underscore the need for strategic hedging.
Why should I care?
For markets: Navigating political and economic uncertainty.
With candidates like Donald Trump and Kamala Harris proposing different economic policies, currency markets could have a significant impact depending on the election outcome. Trump’s plans for tariffs and immigration controls could inflationwhich could potentially strengthen the dollar, while Harris’ focus on housing and price controls could have mixed inflationary effects. Such uncertainties are causing companies to hedge more actively to anticipate changes in monetary policy and market reactions.
The overall picture: Security for a stable future.
In addition to using traditional options, US companies are increasingly using collar and exotic options for long-term hedging. This strategy helps manage the risks associated with major transactions such as mergers and anticipate longer-lasting political and economic uncertainty. Companies are also returning to the options market after long hiatuses, aware of potential risks and needing financial stability.
