Articles
November 5, 2025
Hedging in Volatile FX Markets To Reduce Risk in Cross-Border M&A
# Foreign Exchange
# Risk Management
Morgan Stanley discusses managing FX risk in cross-border mergers and acquisitions, and the risks of basing decisions on market forecasts.
Chief among the risks facing corporates engaged in cross-border M&A this year is not making timely decisions on their FX hedging strategy amid volatile currency markets. This conclusion emerged in a panel discussion among executives from Morgan Stanley at the fall meeting of NeuGroup for Foreign Exchange sponsored by the bank at its New York headquarters.
- “This year, I have seen European and U.S. corporates move more slowly in making decisions around what they should do in the context of FX hedging than in the past,” said Lyndal May, North America Head of Sponsor & Corporate FX Sales at Morgan Stanley. “I think that it’s because of how volatile the FX market has been and therefore challenging for those who are not regular M&A participants.”
- Debates among senior leaders about the direction of currency markets that end up delaying or preventing hedging M&A transactions have emerged as the U.S. dollar has fallen about 8% this year as measured by DXY, an index comparing USD to six major foreign currencies. The dollar suffered its worst decline in 50 years in the first half of 2025.
Stay clear on the purpose. Ms. May and her colleagues emphasized the need to hedge FX exposure in M&A in a manner that does not risk raising the cost or diluting the value of a deal that may take well over a year to move from signing a purchase agreement to closing a transaction amid shareholder and regulatory approvals.
- In the context of M&A, “it’s best to not focus on the minutia of FX movements at that specific moment,” she said. “How do I actually insulate my transaction from these exogenous variables? If you have a view, how is that reflected in your hedging strategy without assuming additional risk?”
- When crafting bespoke hedging solutions, “I am constantly striving to get people indifferent or agnostic” to FX movements, said one of the other Morgan Stanley bankers on the panel.
- Through this ‘agnostic’ goal, more companies may decide to hedge, even if markets at that moment are in their favor and the deal in question can tolerate a modest negative move in FX. Ms. May gave an example from Q1, where a corporate buying a foreign company thought it “could wear the FX risk” and decided to go unhedged.
- Later in the year, the purchase price currency had moved so far against it that the company suddenly decided to hedge, which Ms. May likened to catching a falling knife. “It’s like saying I don’t think my house is going to burn down, and then you see a spark, and then you start to buy insurance on it, and then that insurance is going through the roof.”
The value of deal-contingent forwards. One way to avoid such a scenario is by hedging with deal-contingent forwards (DCFs). They’re used by companies that don’t want to risk losing money on a standard forward where they are forced to unwind the trade at a loss if a deal falls apart. “If you really start to dig into the financials for all those that have done M&A over the last five years, you will see a lot of people hedge and a lot of people use deal contingent-forwards,” Ms. May said.
- A white paper by Chatham Financial recently offered this clear explanation of deal-contingent forwards: “Unlike an FX option, a DCF involves no upfront premium payment (similarly to a vanilla FX forward). Instead, the premium for the deal-contingent feature (i.e., the cost the buyer pays for the ability to walk away from the hedge in the event that the transaction fails to complete) is ‘embedded’ into the DCF’s contract rate. The result is that the buyer locks in a slightly worse exchange rate than they would have done with the equivalent vanilla forward.
- “Importantly though, the deal-contingent premium is only payable if the transaction completes and there is now an obligation to settle the hedge. In this way, the DCF combines the best characteristics of a vanilla forward with those of an option. By design, the cost embedded into the contract rate is only a fraction of that of the equivalent option as the buyer is only permitted to walk away from the hedge if the acquisition fails to complete. This unique feature explains the popularity of deal-contingent solutions.”
Treasury needs early involvement. Perhaps the best way to avoid hedge indecision, or the stress of trying to hedge FX risk when it’s essentially too late, is to involve treasury earlier in M&A transactions. “All these discussions take time and if you want to optimize the outcome, I would encourage you to start these discussions earlier,” said one of the Morgan Stanley panelists.
- He acknowledged the difficulty of doing that when senior corporate leadership keeps details surrounding potential transactions on a need-to-know basis. “But you should encourage your management team to give you access early on to optimize the outcome when you get to the signing,” he said.
- Companies that formulate an FX hedging strategy and calculate its costs early in the process, he argued, can navigate the competitive bidding process more effectively. “If you have a better strategy, if you have conviction around mitigating the risk around FX, that can be a key competitive advantage when you compete against the other bidders in an auction process,” he said.
Framing the challenge. The takeaways from the session come as global M&A volume appears to be growing, putting increased focus on the responsibilities of FX risk managers. Ms. May summarized the challenge this way: “How do you balance risk-reward when it comes to dealing with internal decision makers who are already paying M&A fees, they’re already paying fees on financing, and they’re also paying a premium on the purchase price? These are common conversations that come up time and time again.”
- As more deals materialize and companies debate the pros and cons of hedging, it’s important for senior leaders to know, she said, that publicly disclosing a cross-border M&A transaction cost conveys an FX rate. “If you’re making announcements when you’re doing deals, you are expressing the dollar cost, typically, of what you’re buying. And if it’s in another country, you are explicitly telling the market an FX rate.
- “So if you haven’t locked it in and you are saying, ‘OK, I’m buying this company in Europe and I’m going to be spending $1 billion, and six months goes by and you’re actually spending $1.3 billion, people start asking questions: ‘OK, why?’”
Morgan Stanley personnel who are quoted in this article are in sales and trading and their commentary was made for institutional investors; this commentary is NOT a research report; tax, legal, financial, or accounting advice. The views expressed may differ from others at MS (including MS Research). MS may engage in conflicting activities—including principal trading before or after sending these views—market making, lending, and the provision of investment banking or other services related to instruments/issuers mentioned. No investment decision should be made in reliance on this material, which is condensed and incomplete. This does not constitute an invitation or solicitation to enter into derivatives transactions under CFTC Rules 1.71 and 23.605 (where applicable) and is not a binding offer to buy or sell any financial instrument or enter into any transaction.