Hedging on Venezuela

Hedging ShearsCNBC has an interesting article on the companies that are taking a hit thanks to Giordani et al. They provide some detail into the issue of why these companies didn’t hedge against the risk of devaluation, even when everyone knew it was coming. The money quote:

In Venezuela, “there is very little a company can do to hedge their exposure,” Willie Williams, director of institutional derivative sales at Societe Generale, told CNBC.com. “There is no non-deliverable forward market like in Brazil to hedge exposures. The best many companies can do is have expenses denominated in bolivars as well.”

Even if a company could find a way to hedge bolivar exposure, it could be very costly, says Eduardo Suarez, a currency strategist at Scotiabank. Trading volume in the “formal market” for the bolivar is usually less than $100 million per day, he says, and “such a small formal market would probably mean very high costs for the large transactions multinationals would require.”

There would be carrying costs for a hedge as well, he said. “Unless you time the hedge very well, you would be forced to pay a large negative carry to keep the hedges on for a prolonged period due to rate differentials.”