12.12.2011
By Terry Flanagan

FX Options Use Escalates

Companies are revamping hedging strategies in light of Eurozone crisis.

A rapid increase in the use of FX options is being attributed to the heightened volatility in international currency markets, and the increasing need for corporations to review their hedging strategies in times of increasing uncertainty in the Eurozone.

“The use of options by corporations and asset managers is growing due to volatility in the currency markets,” Gilmore Bray, global managed services director at Misys, told Markets Media.  “Options provide flexibility because they represent a right but not an obligation to take delivery of the currency. The use of put and call options are first used, and then as one becomes comfortable with more complex instruments that can be tailored to specific company situations  exotic options begin to be used.”

Misys, a global application software and services company, said an analysis of client activity using Misys Confirmation Matching Service (CMS) in 2011 compared to 2010 shows a rapid increase in the use of foreign exchange (FX) options by its corporate and fund management clients.

Taken from the activity of 130 of its more than 1,000 global clients, including all of the top 10 foreign exchange banks, Misys analyzed the amount of options matched through its CMS solution and found that from September 2010 to September 2011 there had been an increase in matched trades of over 100%.

The rise in the volume of FX options is part of a broader trend of corporations updating their hedging strategies owing to the uncertainty in the Eurozone. FX options are now increasingly the strategy of choice as they provide much more flexibility and protection against the volatility.

The larger volume of options activity over Misys CMS remains vanilla put/call options, but there are an increasing number of exotic options matched on the service, which are primarily Barrier Options.

“I do not believe options are being used for speculation by corporate treasurers although they are used by fund managers and hedge funds under certain situations to increase yield of course at a risk,” said Bray. “Misys CMS is able to handle both put and call as well as complex options.”

This has been enhanced and facilitated by the industry/market adopting new ways of confirming these exotic options using SWIFT messaging, of which Misys CMS was part of the industry working group that drove this change.

The Misys Confirmation Matching Service enables trade confirmation easily within one hour of the trade being executed for FX, Money Market, FX Options and Exotic Options. Misys CMS performs matching of FX Options (put and call options) as well as exotic options and other derivative instruments through customized templates.

Misys continues to participate in the Industry Post-Trade Automation working group and works closely with the members to provide innovative solutions to automate the widest range of options-based products, the company said.

Related articles

  1. Algorithms have become more prevalent in the spot FX market.

  2. Global Foreign Exchange Committee has made recommendations on Last Look.

  3. There is a growing demand for transparency in FX trading by regulators.

  4. CLS has also enhanced its existing suite of alternative FX data products.

  5. FX Global Code sets out good practice for last look and provides illustrative examples.