Corporates pressed on FX hedges as dollar surge bites

Foreign exchange losses have begun to mount for some of the largest global corporates, with the likes of Amazon, Apple and Nike reporting revenues negatively affected by continued US dollar strength in the fourth quarter.

Since September, the dollar has risen by as much as 7% against many G10 and emerging market currencies, reducing the demand for exports and the value of foreign returns.

In the past, it was common for analysts and investors simply not to ask about or even consider the FX hedging programmes used by corporates. Now, though, as markets try to navigate the uncertainty sparked by the new US administration and assess its ramifications for the dollar, analysts want more clarity on how firms are tackling the impact of the dollar on their overseas operations.

“Whenever there are material moves in the US dollar, investors pay much more attention to it than they otherwise would. And when we’re in a period of relatively low volatility, unlike right now, you don’t see as many questions about this,” says Amol Dhargalkar, managing partner and chairman at Chatham Financial.

Layering is again… becoming more of a focus

Tom Gavaghan, Kyriba

Amazon, which notably opts not to use derivatives to hedge exposures, last week reported a whopping $2.3 billion hit arising from year-over-year changes in FX rates. The tech giant’s 2025 first-quarter guidance now indicates an “unusually large, unfavorable” impact of around $2.1 billion, or 150 basis points.

Similarly, in its latest earnings call on January 30, Apple’s senior vice-president and chief financial officer, Kevan Parekh, explained that as the US dollar strengthens significantly, he expects FX to have a negative impact of 2.5% on revenues year-over-year.

Unlike Amazon, Apple makes use of derivatives such as forwards and options contracts to hedge certain exposures, but it acknowledges that the use of such instruments may not be effective in offsetting adverse moves in exchange rates.

In its most recent 10-Q, Apple reported more than $47 billion in outstanding notional FX contracts and $96 billion in fair value hedges.

At Warner Music Group, where foreign income makes up the majority of its total revenues, FX knocked roughly $36 million off adjusted operating income before depreciation and amortisation (OIBDA) and 200bp off margins.

In the group’s most recent earnings call, Bryan Castellani, chief financial officer at WMG, said: “During the quarter, we faced significant FX headwinds, largely driven by the strengthening of the dollar against key currencies such as the euro and pound, given that more than half of our revenue is in non-dollar currencies.”

The substantial hit to margins saw Castellani having to field a question about how WMG plans to hedge and monitor these headwinds. The firm expects negative FX impacts of about 2–3% on revenue and OIBDA year-over-year, moderating over time.

WMG notes that it hedges 50% on a quarterly basis. The firm primarily uses forwards contracts – as of December 31, it had outstanding options on forwards hedges of nearly $700 million with fixed rates that will be settled in September 2025.

Meanwhile, Nike also said it expects revenues to be down by “low double-digits”, reflecting a worsening FX landscape. However, the firm reported no material changes to the hedging strategy it disclosed in its 10-K for the fiscal year ending May 2024.

Diageo, the global alcoholic beverage distributor for Guinness, Johnnie Walker and Aviation Gin, indicated that based on exchange rates at the end of 2024, FX would deliver a negative impact of $250 million on its net sales and $200 million on operating profits.

The company uses FX forwards and swaps in its hedging programme but noted this could change for the year ahead.

“On FX, we are looking at our hedging policy and will revert on this for next year. The changes that we are looking to make will be focused on reducing volatility and providing more clarity on our hedging approach,” stated Nik Jhangiani, chief financial officer, Diageo, as part of the firm’s 2025 interim H1 results.

Layer cake

The broad consensus from market strategists and analysts is that the US dollar will remain stronger for longer.

But this can change quickly, as seen during last week’s U-turn by President Trump on enforcing tariffs on Canada and Mexico, resulting in a slide in the US dollar against the peso and Canadian dollar.

As a result, stakeholders are increasingly taking stock of corporate FX strategies going into a year of likely continued volatility.

In Netflix’s most recent earnings call on January 21, chief financial officer Spencer Adam Neumann was asked by Wells Fargo analyst Steven Cahall whether it will underperform its targets due to a stronger dollar.

“I want to stress that we view hedging as sort of a short-to-medium-term solution at best. Our focus has always been to manage the underlying operating results of the company through natural hedges where we can, plus pricing and cost structure over time,” said Neumann.

Roughly 60% of Netflix’s revenues come from non-US dollar currencies. The company looks to hedge around 50% on a rolling forward 12-month basis using a price-average programme – otherwise known as a layered hedging approach – to smooth the impact of FX and reduce short-term volatility.

“Layered [hedging] is a super-common hedging technique for corporates. Firms might be hedging 80% of their first-quarter exposures, 60% of the second, then 40%, then 20%,” explains Dhargalkar at Chatham Financial.

Treasurers can then add layers of additional hedges throughout the year to reach their average yearly hedge ratio.

“Layering is again, objectively, becoming more of a focus. The volumes are going up. That is only indicative, I think, of an increase in layering. If you shorten those data points, it’ll easily allow you to unwind, reverse out or increase or decrease your positions while you do it,” says Tom Gavaghan, vice-president of global pre-sales at corporate treasury software provider Kyriba.

Editing by Joe Parsons