FX derivatives activity flat but healthy

The total notional value of FX derivatives contracts in H2 2002 was $18.4 trillion, up 2% from $18 trillion in H1 2002.

Notional value in FX options was slightly down in H2 at $3.2 trillion, from $3.4 trillion in H1 2002. But H1 2002 saw a 39% rise in options values, and those amounts were largely similar in H2.

Indeed, market participants have reported healthy volumes in FX options, and many banks, such as TD Securities, Bank One and American Express Bank have hired dealers and established new desks to snare extra business.

An uptick in figures is likely to be expected when the data for H1 2003 is made public later this year. Market participants reported a rise in derivatives use, particularly in the US, where fears of a hedging crisis arose due to the lack of hedging by uncertain US corporates.

But those fears were allayed by the trend for a weaker US dollar, which began in earnest at the tail end of last year. That led US corporates, particularly importers, to increase their hedging activity.

FX forwards activity -- another area reported to be growing -- saw an uptick of 3% to $10.7 trillion from $10.4 trillion, while notional values in currency swaps also rose to $4.5 trillion from $4.2 trillion.

Euro-denominated forex derivatives saw the greatest increase in values over the period -- up 20% to $3.8 trillion from $3 trillion in H1 2002. Analysts said the increase could be explained by the euro’s rise against the dollar, which began during H2 2002.

In other currencies, values were relatively static, although Swiss franc and sterling derivatives did see some increase in activity. Contracts of between one and five years were the most popular, with short-term contracts seeing less of an increase in notional values.