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Companies' forex hedging jumped in before Brexit vote

Companies' forex hedging jumped in before Brexit vote
July 11, 2016
LONDON - Hedging of currency risks by small and medium-sized British companies surged before June's referendum on EU membership, but thousands were probably still exposed to the past fortnight's huge swings in the pound, a survey on Monday showed. The survey of 2,200 British companies by banking researchers East and Partners showed all those with turnover of 20 million to 100 million pounds a year had used FX options to protect themselves against shifts in the value of currencies they needed to buy or sell in the first half of this year. That compares with just under 90 percent a year ago. Almost all also said they had made either regular or occasional use of FX forwards since January. Forwards and options contracts allow companies to exchange cash in future at a rate set today, or to be remunerated for disadvantageous moves in currencies in between times. They pay a small percentage for the privilege. "We saw it in a round of research we did earlier this year, that there was an increasing move towards hedging, and obviously the referendum was a key driver for that," East and Partners head of European client services Simon Kleine told Reuters. "That trend has been coming through, it looks like this has been the tipping point." Of the smaller companies in the survey, however, with revenue up to 20 million, only around a fifth had used options and up to a quarter forwards. A previous round of research conducted in April showed that only 17 percent of companies in that category of the smallest businesses thought the pound would weaken after a vote to leave the European Union. Sterling has weakened 13 percent against the dollar and more than 10 percent against the euro since the result of the vote. "What this survey says is that UK small business really needs to wake up now and be a lot smarter about how it manages its FX needs," Kleine said. "You are getting those who are thinking about it. But if you look nationally, you are still seeing a lot who are completely exposed." Bankers and other industry players say the arrival of a generation of brokerages has begun to provide smaller companies with the sort of detailed risk management advice that banks have traditionally only given their biggest clients. But the survey also showed that non-bank providers still have a just 15 percent share in the forwards market and 12.6 percent of options. -Reuters