Daewoo Shipbuilding takes flexible approach to FX hedging

South Korea's clampdown on foreign exchange derivatives won't affect the hedging activity of Daewoo Shipbuilding & Marine Engineering Co., an executive at the world's third-largest shipbuilder by order value said The comments suggest rules introduced by the government last week aimed at making the financial system less prone to shocks from abrupt capital movements in and out of the country may not be a major burden for exporters, the heart of Asia's fourth-biggest--and export-driven--economy.
The authorities believe excessively large forward positions in the foreign exchange market pose a risk to stability of the financial system and are phasing in stricter rules that will force banks and companies to keep their positions below new, lower limits. For companies, the rules limit the size of forward forex transactions to the amount of revenue they seek to hedge. Previously, they could enter positions of up to 125% of the expected revenue stream.
"We see no impact from the government's new ceiling on export-oriented companies forward trading as we usually hedge less than 100% of our net exposure to foreign-exchange risks arising from payments we receive from our clients for ships we build," the executive said in written comments to Dow Jones Newswires.
"To better cope with high foreign-exchange market volatility, the company will take a flexible approach though it will largely stick to its existing stance," he said.
The executive, who is in charge of the company's foreign exchange operations, declined to be named in this article.
Many Korean exporters, including Daewoo Shipbuilding, hedge their foreign-exchange exposure with forward contracts. The dollar sales have put substantial upward pressure on the won, a currency subject to large swings driven by changes in risk sentiment. The won has fallen 7% against the dollar from a high in late April, hit by recent jitters over fallout from Europe's sovereign debt challenges.
Daewoo Shipbuilding, which is based in Geojedo in Southeastern Korea, hedges 70%-80% of its net foreign currency exposure through forward contracts, the executive said. That is roughly in line with its bigger rival Hyundai Heavy Industries Co. which an executive at that company told Dow Jones on June 10 had hedged 80% of its net foreign currency exposure.