The Greece debt crisis have been around for a quite long time now. While this crisis is well documented, major deficit has led to huge borrowing cost and enormous bailout from the European Financial Stability Facility (EFSF). This have an effect on euro foreign exchange movements. While the stories develop, how will this effect the eurozone companies' on their currency hedging strategies?
As reported by BBC the background of the Greece crisis is caused due to heavy spending beyond their limits even before adapting Euro. Nevertheless, this debt crisis has lead for a bailout loan of 110bn euros in May 2010 to help
overcome the crisis. Further in July 2011 it was earmarked to
receive another 109bn euros. Greece has won a 53.5% reduction in its debt burden to private
creditors.
The future of the Euro is affected due Greece debt crisis and also due to debt issues in Italy .This single
currency is at 52 week lows against the pound and 17 month lows against
the US Dollar. Changes in the value of currency in such a major region
obviously have an important effect on companies operating in the zone.
As reported by David Goodman for Bloomberg, after 17 month low the euro has appreciated 5% against the U.S. dollar. This is due to the billions of euros put in to the banking system, to support stimulate the economy.
On the other hand as reported on Financial times this eurozone crisis and the uncertainty, have lead small and medium-sized enterprises (SMEs) to become more sophisticated in
their use of currency hedging strategies.
There are different strategies a firm can adapt to avoid foreign exchange risks. Such as; insisting foreign customers to pay in company’s home currency, netting, matching the inflows and outflows in different currencies caused by trade, leading and lagging, forward market or futures hedge, money market hedge or even currency option hedge. Also, firms could even do nothing and simply take the risks, hoping for favorable foreign exchange rate movements.
The essential element of forex hedging is for risk mitigation, and it helps to keep the cost stable. However, survey conducted last year by American Express FX International Payments revealed that around 55% of all UK SMEs still do not use hedging strategies. Why is it even with a highly volatile forex some companies don't use this as a benefit. It could be probably due to the complexity and inflexibility. Nevertheless while the eurozone inject more money into the banking system and the further steps on bailouts is more likely to increase the rates. Hence this appreciation could be best for some companies to do nothing even they adopt a spot or forward rates, hopefully Euro will be back to its position and that appreciation could be taken as an advantage.
Source:
www.ft.com
www.bbc.co.uk/news
http://realbusiness.co.uk/news/the-greek-crisis-and-what-it-means-for-uk-plc,
The essential element of forex hedging is for risk mitigation, and it helps to keep the cost stable. However, survey conducted last year by American Express FX International Payments revealed that around 55% of all UK SMEs still do not use hedging strategies. Why is it even with a highly volatile forex some companies don't use this as a benefit. It could be probably due to the complexity and inflexibility. Nevertheless while the eurozone inject more money into the banking system and the further steps on bailouts is more likely to increase the rates. Hence this appreciation could be best for some companies to do nothing even they adopt a spot or forward rates, hopefully Euro will be back to its position and that appreciation could be taken as an advantage.
Source:
www.ft.com
www.bbc.co.uk/news
http://realbusiness.co.uk/news/the-greek-crisis-and-what-it-means-for-uk-plc,
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