Bet on the future rate of the dollar or hedge the risk? (Photo: ShutterStock)
When the price of housing rises or when prices are raised in the supermarket, we all know how to cluck our tongues and cry about the cost of living, but there is a hidden cost inherent in all of our investments - including mine, who has never invested a shekel himself in the stock market, but only sets aside his salary for retirement: the cost of hedging the foreign exchange, which costs us all up to about 1.3 billion dollars per year. The
hedging is designed to protect the foreign exchange rate.
What is foreign exchange protection? It is a cost that we all bear through the funds managed by the pension funds, training and insurance companies, which "insure" our funds that are invested by them abroad against the risks of sharp fluctuations in currency rates that could damage savings.
The "insurance" comes in the form of hedging the risk inherent in the purchase of their various assets abroad, such as stocks and bonds, using foreign currency, especially the dollar, which is the main foreign currency traded in Israel (and the world).
But this cost has increased significantly in the last year;
The cost of foreign exchange hedging for the year increased by approximately 0.7% to 3.07% as of the end of last November, and has since decreased to approximately 2.5%. This is according to data from the Financial Markets Division at Bank Hapoalim, and according to the type of transaction requested. The
increase led to resentment among the institutional bodies, due to The share that this hedging cost detracts from their positive results, or alternatively (which is more characteristic of the capital market of 2022) deepens the negative ones. Along with this, it should be noted, as mentioned, that the payment of the cost ultimately comes out of the pockets of the saving public. The pockets of all of us.
Shekels versus dollars, that's the whole story (Photo: ShutterStock)
Big money, small market
Although the percentage seems tiny and insignificant, the Bank of Israel data show that all the institutional factors in Israel (insurance companies, pension funds, investment houses, etc.) are exposed to approximately 176.32 billion dollars as of the end of last September, which is approximately 27.8% of the size of the aggregate investment portfolio under management By them.
Bank of Israel data also show that all institutional entities hedge about 30% of their exposure to foreign exchange (without derivatives) as of the end of last September, which puts the cost of their foreign exchange protection at about 1.3 billion dollars per year.
The cost could be greater in the absence of hedging, even so about 70% of the remaining exposure of the institutional bodies to the foreign exchange assets could absorb significant decreases. But if the institutions hedged their full exposure to the foreign exchange, the cost would climb up to about 4.4 billion dollars.
why is it happening?
Mainly because the Israeli market is small for the amount of money that the institutional bodies manage, which according to the Bank of Israel data for last September is about 2.6 trillion dollars.
The institutional entities do not have enough possible assets for investment in Israel at the risk levels required of them, and therefore they direct their colleagues' funds to purchase various assets abroad.
In this context, we note that the amount of institutional assets last September represents a decrease of approximately 5.5% compared to their total assets last January. Among other things, due to the recent declines experienced in the markets, which are about NIS 150.7 billion less.
Therefore, any additional burden on the investment costs today, greatly burdens the possibilities of the growth of investors' money at this time.
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Submitted by Apostrophe
Moody Shaffer, Chief Financial Markets Strategist.
Bank Hapoalim (Photo: Inbal Marmari)
The exposure increases with the interest rate in the US
Modi Shafferer, chief financial markets strategist at Bank Hapoalim
, explained to Walla!
money, because "the foreign exchange market operates according to supply and demand like any other market, and the local market has experienced an extensive demand for dollars since the beginning of the year, which stems from a number of main reasons.
One of them is the considerable strengthening of the dollar currency in the world against the background of the sharp increase in interest rates in the US, which directs capital towards dollar deposits.
Another reason is the wide exposure of the institutional bodies to foreign exchange, which only continues to expand, due to their need to locate investment assets that are suitable for their investment policies , and who are not in Israel.
This is in the shadow of the growth of the population and the local economy, which expand the amount of money handled in them.
The purchases of the various investment assets abroad take place according to the currency in which they are purchased, so for example, if a certain pension fund purchased shares in a company traded on the American stock exchange, it made the purchase in dollars. Hence its exposure to the dollar.
The institutional bodies in Israel invest part of their investments abroad through futures contracts. Hence, when the stock markets in the US fall - the institutions are forced to increase the collateral on those contracts, and to purchase dollars during periods of declines in the markets.
The fluctuations between the dollar, with which the purchases were made, and the shekel, the currency with which the Israeli economy operates - which enters and exits the institutional bodies, can have an impact no less than the fluctuations of the shares of the company that the same institutional body purchased.
Moreover, during sharp declines in the markets, institutional entities tend to purchase dollars, usually to moderate the declines in the shekel portfolio.
This is because when the stock markets in the world fall sharply, the exposure of the institutional entities in Israel to foreign exchange decreases with them, since if an asset increased by X dollars after the decreases, it already increased less, and therefore their exposure to the dollar value of the asset decreased.
But since the dollar is a form of protection for the portfolios of the institutional entities since it often rises when the markets fall, the institutions tend to purchase foreign exchange during these periods to increase their dollar exposure again."
Want to know how the bond market affects our housing prices?
https://finance.walla.co.il/item/3543685
Exporters: sell the future dollar rate at a price lower than the current rate.
The margin between the two is the hedging cost (Photo: ShutterStock)
back to the Future
The institutional bodies, however, are not the only body that seeks to protect its assets in foreign currency, and they are joined, among others, by the exporters, and this is of great importance in an export-biased economy such as Israel.
In this context, Shafferer added: "An exporter who wants to hedge himself is a good example To understand the foreign exchange market, since in the current situation the same exporter sells the future dollar rate (Forward - a transaction at a pre-agreed rate and a specified amount that will be executed on a given date in the future) at a lower price than the current currency rate (Spot - the currency rate on the day the forward transaction was executed) in the country where He exports. The spread between the exchange rate on the day he executed a transaction and the exchange rate at which he actually sold is his hedging cost."
Since these are significant costs arising from the spreads of currency rates, there are many pointing fingers at the regulator - the Bank of Israel, whose duties include stabilizing the currency and maintaining its value against the dollar, which is the main currency with which the Israeli economy operates.
In this context, it should be noted that the Bank of Israel issues more MCMs (short-term lender, a type of government bond) and absorbs shekel liquidity in the system.
In doing so, he pushes hedging costs down.
Since the payment comes indirectly from the public's pocket, the question arises, is there not another way through which the amount of the bill can be lowered for him?
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