Declining engagement in FX Options among Asian businesses

March 24, 2021

SINGAPORE -- Small and mid-sized businesses in Asia are turning away from FX Options as uncertainty from the coronavirus pandemic fuels volatility in major currency pairs, latest research from East & Partners Asia reveals. Just one in three (33%) businesses in the region now use FX Options to mitigate currency risk, slipping 11% from a year ago, while Forward FX adoption reaches a record high of 4%.

The bi-annual research tracks Spot FX engagement and uptake of FX hedging solutions from 1,865 businesses across four major markets in Asia -- Hong Kong, Malaysia, the Philippines and Singapore. It is based on direct interviews with key business decision- makers including business owners, chief financial officers (CFOs), finance managers and corporate treasurers.
The report says FX Options, an inherently complex and relatively expensive means of hedging FX risk compared with vanilla Forwards, has been gaining traction in the past decade, thanks in part to improved understanding of the product among businesses and digitisation efforts which have increased transparency of the Option flow. 
That started to change in early 2020 when the COVID-19 outbreak expanded in the region and beyond. Fewer sub-US$100 million turnover businesses used the FX instrument, giving up some gains as penetration rates fell to late-2017 levels.
"This seems counterintuitive considering FX Options offer much-needed flexibility, especially at a time when cash flows are harder to predict," the report says.

"One possible explanation is that, as a result of surging FX volatility, Option premiums have increased, making hedging rates less attractive. Additionally, the steep unexpected decline in cross-border trade might not warrant the use of such complex hedging tools," commented East & Partners Asia Business Head, Sangiita Yoong.

Market-wise, FX Option adoption rates in Singapore have dipped below the 50% mark to 47% - a level last seen in H1 2018, while less than two in five businesses in Hong Kong (39%), Malaysia (23%) and the Philippines (20%) use the risk management solution.
According to the report, all major FX Option providers saw their customer satisfaction rates decline by 3 points to 8 points each over the past six months. This suggests that businesses are becoming increasingly unhappy about the product and service offered. At the same time, there is also a wave of consolidation happening within this capital-intensive market, where larger providers are getting bigger as engagement declines. (ATI).