Currency Risks in the Era of High Interest Rates: Is Hedging a Necessity for Businesses in 2025?
Taking a gander at the booming Belarusian market, it's evident that businesses are eager to navigate the wavy waters of currency risks with the help of hedging tools.
The unpredictability of exchange rates, rampant inflation, and limited access to international financial instruments call for sharp tactics to manage currency risks for importers, exporters, and companies with foreign revenues. By implementing a smart strategy, companies can not only shield their budget but also unlock new avenues to financial stability.
In a conversation with the head of the investment products sales department at LLC "Aigensis," Alexei Smirnov, we dive into the opportunities available to businesses for hedging in today's market.
In the Belarusian market, unsaturated demand for currency risk hedging has stirred up conversations. What's the scoop in the Russian market?
Let's talk turkey – currency risk hedging is the art of using special financial instruments or strategies to safeguard businesses from potential losses due to currency fluctuations. By fixing the cost of currency commitments or receipts, you can reduce uncertainty and stabilize your company's financial results.
There are various tools at your disposal to hedge your risks:
- Futures - prearranged agreements to buy or sell currency at a future date through an exchange.
- Options - the possibility (but not the obligation) to buy or sell currency at a future date, either on an exchange or over-the-counter.
- Forwards - agreements between parties to buy or sell currency at a future date at a fixed price.
- SWAP transactions - an exchange of currencies with an agreement to reverse the transaction at a later date, mainly used in interbank trading.
- Currency time deposits - a roundabout approach to reducing risk by securing interest rates in foreign currency.
Things are still on the green in the Belarusian market as far as currency risk hedging is concerned. Amid limited specialized instruments, businesses relies on individual solutions via banks – forward contracts and SWAP transactions – for a select few clients.
So, does the cost of hedging on the futures market directly correlate with the current level of ruble interest rates, which are steep these days?
Absolutely! As the Russian ruble interest rates are high, currently standing at 21% per year (as of April 2025), hedging comes at a price. To break it down, hedging is usually constructed through two transactions – SPOT (buying or selling currency here and now) and a forward contract (forward or futures for the future). The cost of the forward contract stems from expenses on ruble resources.
Why's that? The gap between ruble and dollar interest rates directly affects the cost of hedging. For example, if the ruble rate is 21% per year and the dollar rate is around 5%, the 16 percentage point difference is reflected in the forward rate. To put it simply, the futures price of the dollar in three months will be 3.9% above the current rate. This is the natural cost of the difference in currency yields.
Are hedging positions beneficial for importers in the current climate?
Absolutely! With surging volatility in currency exchange rates, inflation, and sanctions-related restrictions, it's more important than ever for companies to safeguard their budgets from currency fluctuations.
In the capacity of a broker, can you minimize the costs of funds that clients deposit as collateral for trading on the futures market?
We accept highly liquid assets as collateral, predominantly cash. However, on a case-by-case basis, you can use federal loan bonds (like OFZ-PD 26234 with a maturity date in July 2025, offering a yield of around 20.77% per year) as collateral.
Can exchange-traded instruments help businesses cut costs when compared to bank forwards on currency?
In many cases, yes! The presence of interest income on collateral enables a reduction in overall hedging costs, making exchange-traded instruments a more appealing choice.
Companies are finding short-term investments tricky given sky-high interest rates. In this scenario, how do exchange-traded instruments stack up against bank deposits overnight?
Overnight deposits are a time-honored way to park excess funds for a short spell with minimal risk. Although they're convenient for short-term investments, the yield may fall short of market-based alternatives.
On the other hand, exchange-traded instruments, such as bonds from dependable issuers on the Belarusian market, allow businesses to fine-tune their liquidity management strategy – from 7 days and longer – and potentially achieve greater returns: yields currently range from 12.5 to 21% per year, depending on the investment period. Here's the cherry on top: these returns are tax-free income.
What's the entry threshold for the exchange repo service with a central counterparty, which resembles a bank overnight? What are its advantages?
Exchange repo with a central counterparty is a convenient tool for managing short-term liquidity, essentially an analog of a bank overnight, but traded on the exchange.
Previously, different brokers were obligated for any repo transaction on the Belarus Currency and Stock Exchange – one client worked with one broker, the other with a different broker. This made the process intricate. With the introduction of a central counterparty, it's now simpler: all calculations can be done through a single broker. The exchange itself serves as the guarantor of fulfillment of obligations, so there's no need to find and agree on a second party to the transaction.
On the Moscow Exchange, repo transactions are available with terms ranging from 1 day to 3-6 months. The yield on these transactions is usually 1-2 percentage points lower than the key rate. With the current key rate in Russia at 21% per year, the effective yield on repo averages 19-20% per year, contingent upon the collateral, transaction term, and market conditions.
The entry threshold for repo transactions is a mere 100,000 Russian rubles, rendering the instrument accessible to medium-sized businesses.
Is a bank overnight still the wiser choice for large companies with considerable balances in their accounts for short-term placement?
For short-term placements up to a week, a bank overnight may pencil out to be more advantageous due to added expenses associated with exchange transactions, such as brokerage commission and clearing fees.
For companies with extended liquidity needs, which exchange-traded instruments make a suitable fit?
We don't offer individual investment advice, but we can share the instruments that are currently popular among our clients – legal entities. Many opt for Belarus Ministry of Finance bonds (VGDOs), as well as corporate bonds from issuers like "Aigensis," "ActiveLeasing," and "AVANGARD LEASING". These securities cater to attractive yields and permit flexible selection of placement terms and interest payment conditions, depending on the company's objectives.
- In the Russian market, just like the Belarusian market, there is a growing demand for currency risk hedging, stirring up conversations among businesses.
- By using special financial instruments or strategies such as futures, options, forwards, SWAP transactions, and currency time deposits, businesses can protect themselves from potential losses due to currency fluctuations.
- Hedging costs on the futures market in the Russian market may directly correlate with the current level of ruble interest rates, which are high at present, causing hedging to come at a premium.
- As importers face surging volatility in currency exchange rates, inflation, and sanctions-related restrictions, hedging is beneficial for them in the current climate as it helps safeguard their budgets from currency fluctuations.
- Exchange-traded instruments can help businesses reduce costs when compared to bank forwards on currency, given that the presence of interest income on collateral enables a reduction in overall hedging costs, making these instruments a more appealing choice.
