Hedging in CEE: Big Business, Small Risk

Most countries in the CEE region have their own currencies and their own interest rate policies. Accordingly, corporates face the question of how to hedge FX and interest rate risks when financing projects, either in local currency or refinancing in their home currency and convert. Losses from unfavorable changes in exchange rates and interest rates can have a significant impact on the core business. Hedging these risks can therefore be a competitive advantage: Corporates that have a smarter hedging strategy than the competition can offer their products or solutions at a better price. This is where hedging comes in as an important financial strategy for risk management.

One of the key elements of exchange rate and interest rate hedging is to reduce cash flow variability. With a stable cash flow, other investment opportunities can be better planned, and internal funds become more reliable, a more attractive source of financing given the relatively higher cost of external financing. This is all the more true for smaller companies that have not yet reached a critical mass and have to pay a higher credit spread to obtain external funding due to their size. Hedging can help to balance this mismatch.

Well-founded expertise in capital markets, coupled with experience and a strong presence in the region, is essential for successful hedging. In the CEE region in particular, interest rate policies and regulations are often less transparent and less well communicated than in other countries. Local banks help corporates find their way in this complex and volatile environment, as they are very familiar with local regulations, customs and practices. Another plus: both transaction costs and potential legal risks in cross-border transactions are reduced by having a local business partner. Thanks to our local subsidiaries in CEE, we are able to use our network and presence to offer customers more effective and efficient hedging solutions.

First of all, there is no general hedging strategy that is optimal for every company, every market and every risk. Rather, hedging is very individual and depends on many factors. One thing is clear: corporates benefit from a competent sparring partner with the necessary know-how. Together with an external professional, for example, optimal capital structure, optimal cash positions, optimal fixed-to-floating ratios can be challenged and optimized. The analysis of peer groups can reveal new perspectives. In addition, hedge accounting can limit the use of hedging instruments. With a factual empirical analysis, experts can shed light on the attractiveness of individual hedging instruments in different market environments and corporates can make more informed decisions.   

Corporates with specialized risk departments also benefit from an external partner to exchange arguments and analyze new points of view. In a constantly changing market environment, the in-depth analysis of CEE yield curves can open up new perspectives and help a company to better navigate through volatile times. In the best-case scenario, persistent misconceptions about hedging strategies are reconsidered.