Asian Borrowers Step Up Hedging against Volatile FX

Article excerpt

Byline: UMESH DESAI

HONG KONG, Jan. 28 (Reuters) a" From South Korea to the Philippines, Asian issuers of offshore bonds are increasingly protecting themselves against currency spikes as hedging becomes affordable and financial market volatility increases.

Companies in the region have traditionally borrowed offshore to pay for imported machinery or to repay existing foreign debt. But increasingly local-currency projects are being backed by overseas financing because of their scale.

Asian issuers outside Japan sold a record $46 billion in dollar-, euro- and yen-denominated bonds last year, as the regional economy expanded more than seven percent.

"In the past there was very little hedging back into local currencies due to illiquid markets, high costs and the need to finance dollar outflows," said Neelkanth Parekh, head of Structured Products, AsiaJapan, Deutsche Bank.

He said that Asian borrowers were increasingly hedging their liabilities as currencies become more volatile.

Implied volatilities, a measure of expected future price swings, on the South Korean won, Singapore dollar, Taiwan dollar and Thai baht have risen sharply this month and are currently at multi-month highs.

Despite the regionas average savings rate of over 30 percent and its ownership of over two-thirds of the worldas foreign exchange reserves, Asian borrowers have to raise funds from the foreign currency-denominated international debt markets when local markets cannot support the tenor or size of the borrowings.

Although many corporate borrowers choose foreign debt in a currency that can match their revenue streams, many are increasingly using hedging tools to swap their exposure into currencies that give them a yield advantage. …