CEOs and treasury heads of companies sitting on large mark-to-market (MTM) losses on their foreign exchange derivatives deals will heave a sigh of relief.
That's because the Swiss franc has depreciated 8.76 per cent since it touched an all-time high of 0.9636 against the US dollar on March 17, 2008.
The Swiss franc was the choice of currency for companies entering into cros s-currency swaps.
It was perceived to be more stable than the yen (which is more volatile) as the Swiss franc had not breached the 1.10-level against the dollar.
This means that corporates, which were sitting on 25 per cent losses on their derivatives deals, have pared their losses by 32 per cent from an estimated 25 per cent to around 17 per cent, thanks to the positive movement in currencies.
"Companies sitting on MTM losses would feel relieved," said a Delhi-based forex expert, who advises mid-size corporates. Companies which kept their positions open and didn't panic to close the deals will feel vindicated.
"The Japanese yen and the Swiss franc are the carry currencies, in which people borrow to invest in equity markets. When equities recover and do well, these two currencies depreciate and vice versa," explained a corporate treasury head.
A majority of the currency swaps were executed last year at the rate of 1.22 Swiss franc to the US dollar.
The sub-prime crisis and meltdown in equity markets saw the Swiss currency appreciating against the dollar to touch an all-time high of 0.97 on March 17.
Experts feel this is a significant improvement considering that the Swiss franc was at par or below par to the US dollar only a month ago, but was enough to get the corporates worried.
"They are not out of the woods. If companies were losing 25 cents to a dollar, that would reduce to 17 cents," added the forex expert.
Companies had entered into cross-currency deals to reduce interest or forex risks.
In many cases, they tried to protect their earnings by going in for exotic foreign exchange derivatives and made good money through them last year.
The crisis in the credit markets and adverse currency movements (appreciation of the Swiss franc against the dollar) soured many of these derivatives deals as banks asked these companies for additional security to cover their MTM losses.
Half a dozen companies have taken their banks to court alleging that they were sold exotic derivatives contracts for speculative purposes, causing huge MTM losses.
Many companies have disclosed and provided for losses on derivatives deals after the accounting body advised auditors to ensure that companies disclose losses.
Meanwhile, the Japanese yen has also depreciated by about 9.5 per cent since March 17, when it also touched a low of 95.73 to the dollar.
This will provide relief to companies which had taken a hedge, in exotic products, to cover their yen loans.
