by François Masquelier, Head of Corporate Finance and Treasury, RTL Group, and Honorary Chairman EACT
Banks are seriously contemplating credit-adjusting the prices they quote on FX derivative transactions. The credit parameter to be included in price quotes would have a significant impact on the cost of hedging, unless corporates use collaterals. It may turn out to be one of the consequences of the current financial crisis.
Is the price right?
In the future, treasurers will have to consider the potential extra margin to be included in forward FX transactions to reflect the credit risk faced by bank counterparties. As is the case in the famous game show created by Fremantle, the question to be asked is whether the price is right. Is the FX pricing fair, given the current market situation? For more than two years, some cautious financial institutions have already been quoting higher and longer maturity FX deals, to reflect the greater risk taken. However, one of the unexpected or unsuspected consequences of the current financial crisis is or could be a significant increase of FX pricing on longer periods. Dealers are beginning to think more seriously about credit-adjusting the prices quoted on FX derivatives in general (‘derivatives’ sensu lato, as defined in IAS 39).