Rentokil Initial, a holding company best known for its pest control business, is looking at using foreign exchange derivatives to hedge exposure to currency fluctuations, according to Edward Collis, deputy treasurer in East Grinstead, U.K. He referred further questions toTony Stephens, a spokesman, who denied the company is reviewing its revenue hedging strategy, but declined further comment. Rentokil made headlines in the financial press recently when it admitted taking a GBP10 million hit to profits in the first 10 months of the year due to adverse currency movements in the U.S. dollar and in Asian and South African currencies.
A company could avoid such losses by hedging forecasted revenues through the fx options market, said Greg Kaldor, managing director in foreign exchange sales at Bank of America in London.
A company with exposure to a weakening dollar could hedge its risk by purchasing a six-month dollar put with a strike at USD1.5860 and a notional size of GBP10 million while selling a dollar call struck at USD1.5680 with a notional size of GBP5 million.
Such a structure would be zero-cost and also defers mark-to-market accounting under Financial Accounting Standard 133 and International Accounting Standard 39.
