Currency hedging cost soars with high interests
The cycle of hikes in the Selic, Brazil’s benchmark interest rate, started in March more than tripled the cost of currency hedging, an instrument used by companies and investors to protect themselves from the drops of the real against the dollar. In spite of that, banks assess that the demand for the operation should not decrease significantly, especially given the very uncertain scenario until 2022.With the Selic at 7.75%, a currency hedging operation for 12 months was priced at 11.08% per year last Thursday. In March, when the base rate was 2%, the cost was 3.54%. The calculation takes into account only the evolution of the interbank deposits (DI) and the forward rate agreements (FRA) on DI vs US dollar spread, which provides interest in dollar terms, leaving out the spread charged by the banks, which also varies according to the type of operation and the company’s risk."In fact, the cost of hedging has increased and may grow more, depending on the coming months. However, we did not see any relevant change in the behavior of dollar buyers", says Nuno Martins, head of derivatives structuring at Bank of America (BofA). "At other times, companies shortened the hedge duration to focus on the short part of the yield curve, but that hasn’t happened so far."At BofA, whose portfolio is made up of large companies and multinationals, demand is not expected to decrease solely because of cost. "The same company that benefited from the cost reduction in recent years will now pay a higher price, just like the increase in the debt service linked to the CDI [interbank short-term rate]", says Mr. Martins. He also considers that the cost has increased, but also has the exchange rate volatility. "It is not an easy or rational decision to give up the hedging because it costs close to 10% today, with volatility at 17%," he says.Mr. Martins also notes that there has been an opposite movement, on the part of agents who work on the dollar selling end, such as grain producers. "Many of these have already hedged 40% of the 2022 and 2023 harvests, but some are seeking to lengthen their terms in order to appropriate a higher interest rate differential. For the exporter, the interest differential is a benefit," he says. "Those who, as a rule, sought to protect their income in one or two years, started looking for three or four. It’s not a big move in terms of volume, but we see a trend."At Goldman Sachs, there has been no reduction in demand so far. According to...
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