Risky Currency Bets Cripple Many Companies

In an interesting twist of fate, currency bets are beginning to cripple the corporate sector. Apparently many corporations did not believe that the dollar would strengthen as much as it has. Yesterday, we learned that Citic Pacific lost more than $1.8B due to leveraged contracts on the Australian dollar and the Euro. Their contracts requires them to buy the AUD/USD for 87 cents and the Euro for 1.44. That is a more than 25 percent premium for the Aussie and a more than 10 percent for the Euro.

Unfortunately Citic Pacific is not alone in making these bets. According to the Wall Street Journal today, many Latin American companies have seen large currency related losses. The velocity of the dollar’s rally has given these companies little chance to exit out of their positions at good prices. Instead, they have been forced to take major losses.

I fully expect a similar trend for companies in other parts of the world including Asia.

Hopefully these companies will learn from the losses and start hedging their FX risk completely. To their credit, they did hedge but not enough.

Under the deals, the banks offered financing and currency trades at favorable rates. But there was a hitch. If the U.S. dollar strengthened beyond a certain threshold, then the companies would have to sell dollars at a loss. In some cases, the contracts had triggers that doubled the number of dollars the companies owed.

These companies should stick to their core business and try not to gain a few cents and potentially lose a few dollars by getting involved in the currency markets.

Foreign Exchange

Photo: Wall Street Journal

About Kathy Lien 236 Articles

Kathy Lien is an Internationally Published Author and Chief Strategist of DailyFX.com, one of the world’s most popular online websites for currency research. Her trading books include the highly acclaimed, Day Trading the Currency Market: Technical and Fundamental Strategies to Profit form Market Swings (2005, Wiley); High Probability Trading Setups for the Currency Market E-Book (2006, Investopedia); and Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game (2007, Wiley). As Chief Currency Strategist at FXCM, Kathy is responsible for providing research and analysis for DailyFX, the research arm of FXCM. She also co-edits the BK Forex Advisor, an Investopedia.com Premium Service with Boris Schlossberg – one of the few investment advisory letters focusing strictly on the 2 Trillion/day FX market.

Kathy is also one of the authors of Investopedia’s Forex Education section and has written for Tradingmarkets.com, the Asia Times Online, Stocks & Commodities Magazine, MarketWatch, ActiveTrader Magazine, Currency Trader, Futures Magazine and SFO. She is frequently quoted by Bloomberg, Reuters, the Wall street Journal, and the International Herald Tribune and has appeared on CNN, CNBC, CBS and Bloomberg Radio. She has also hosted trader chats on EliteTrader, eSignal and FXStreet, sharing her expertise in both technical and fundamental analysis.

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1 Comment on Risky Currency Bets Cripple Many Companies

  1. better to employ qualified in house broker,than use an exotic methods such as hedging to make a few cents as stated by kathy. tried it on numerous occassions and seriously got burnt.

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