Trump Trade War Fuels Use of Currency Options as Hedge in Europe

Mint

a day ago

European corporate treasurers increasingly are turning to the options market to hedge currency exposure, a more costly method than typically used, as Donald Trump's trade policies cause bigger-than-usual price swings.
Daily volumes of currency options surged to a record in early April in the aftermath of Trump's 'Liberation Day' tariff unveil, according to data from the Depository Trust and Clearing Corp. At BNP Paribas SA, one of Europe's largest banks, corporate sales of FX options have doubled year-over-year in 2025 to an all-time high.
Companies' increasing use of options for hedging is just one of the many ways Trump's tariffs are re-shaping activity in financial markets. Corporate finance executives are fretting over how to protect their bottom line, given that negotiations are still under way over tariffs that are set to be imposed on July 9.
'Trump has created a lot of uncertainty when it comes to trade,' said Jonas Falk, treasury manager at a unit of flat-pack furniture giant Ikea. He said he's a 'big fan' of using options, a type of derivative, to reduce currency risk and is employing them more than usual this year.
Options give the holder the right, but not the obligation, to exchange currencies at a specified rate on or before a set date. They serve as protection for companies looking to limit losses from adverse price moves, or benefit from favorable ones. Some traders also use them for speculative purposes.
Hedging with options in the $7.5 trillion-a-day foreign-exchange market gives companies flexibility. Regardless of spot prices, a company can let the option expire and trade at current market levels instead.
By contrast, the more popular method of hedging — a forward contract — binds a company to buy or sell according to the initial agreement.
While more flexible, options can be more expensive. Purchasing the right to transact comes with an upfront premium, whereas forwards have no initial cost as the transaction is agreed for the future.
In the case of IKEA Supply AG, which manages the Swedish company's global supply chain, the business is exposed to pretty much every currency in the world. It's paying more for protection against swings in the market this year, Falk said, as it seeks to shield its low-price business model from disruption.
'I'd rather pay up,' he said.
The growth in the use of options is down to the difficulty clients are having with forecasting cash flows, according to BNP, given the lack of certainty about where tariff levels will ultimately settle.
'Companies are buying options for their main utility function which is insurance,' said Fabrice Famery, global head of corporate sales at BNP. 'If you need to adapt your hedging program it's easier than if you enter into a straight forward.'
Asian companies have also shown more interest in using options to lock in greater flexibility as tariff uncertainties persist, said Nathan Swami, Citigroup Inc.'s head of foreign exchange trading for the Asia-Pacific region. While China is inching closer to a trade deal, there's still little clarity over what the final iteration of tariffs might look like across the region.
While the use of options for corporate hedging strategies isn't new, some have shied away from the derivatives as they can come with more of an upfront cost and seem more complicated.
Some companies have been burnt by foreign-exchange derivatives in the past and there have been cases of banks being taken to court for allegations of mis-selling overly complicated instruments. Last year, Deutsche Bank AG resolved a €500 million claim from Palladium Hotel Group over losses suffered on currency contracts.
Now, though, market swings are driving renewed demand for derivatives. Many see volumes continuing to increase, given the growing interest in options-based hedging solutions.
'We're now seeing more of an openness to buy or sell options,' said Lisa Dukes, co-founder of treasury risk management specialist Dukes & King and corporate representative on the Bank of England's FX committee. 'Options has always been a dirty word and kind of linked to speculation when actually it's just another way of managing risk.'
With assistance from Catherine Bosley and Vassilis Karamanis.
This article was generated from an automated news agency feed without modifications to text.