Taiwan’s Life Insurers See Big Drop in Currency Hedging Costs

The Taiwan dollar’s recent weakness and the resulting return of carry trades are quickly driving down local life insurers’ hedging costs.

Three-month dollar hedging costs using Taiwan dollar’s offshore forwards — derived from the differential in the US overnight-indexed swaps and Taiwan dollar implied yield — have dropped to just 3% for the Taiwanese insurers, from as high as 14% three months ago, according to Bloomberg calculations. This decline benefits insurers seeking protection against abrupt currency swings and is largely driven by the Taiwan dollar’s underperformance this quarter and its increased use as a funding currency in carry trades. ...