-- Cathay Financial made wrong bets on euro and British pound in the first half, which resulted in higher-than-expected hedging costs -- Most of the contracts for its wrong bets expired in August -- Cathay Financial expects hedging cost to fall toward its targeted range of 150-200 basis points in the fourth quarter (Recasts the first paragraph, adds strength in New Taiwan dollar versus the U.S. dollar in the second and third paragraphs, Fubon's hedging cost outlook in the eighth paragraph.) By Aries Poon Of DOW JONES NEWSWIRES TAIPEI (Dow Jones)--Cathay Financial Holding Co.'s (2882.TW) hedging cost surged in the first half because it made wrong bets when hedging the New Taiwan dollar against the euro and British pound, but Taiwan's largest financial holding company by assets said Thursday it expects its hedging cost to fall toward its targeted range in the second half, because most of the wrong bets expired in August. The New Taiwan dollar has strengthened against major global currencies and has risen to fresh 13-year highs against the U.S. dollar several times since late last year, boosted by fund repatriation to the island and inflows from developed countries amid easy global monetary conditions. However, the domestic currency's strength has resulted in weaker results when Taiwanese companies' overseas earnings and returns on investment are converted to the local currency. Many companies with overseas operations engage in currency hedging to protect themselves against currency fluctuations, but Cathay Financial's erroneous view on currencies meant that its foreign-exchange losses in the six months ended June 30 was much higher compared to its smaller peers. Cathay Financial said its hedging cost--or the spread between the New Taiwan dollar's interest rate and that of other currencies--was around 350 basis points in the second quarter, down from 360 basis points in the first quarter. The bank said it expects its hedging cost to fall toward to its targeted range of 150-200 basis points in the fourth quarter, helped by the bank's plan to increase its use of lower cost cross-currency swaps to hedge against foreign-exchange risks. The bank declined to disclose more details on its wrong bets. Fubon Financial Holding Co., the island's second-biggest financial holding company after Cathay Financial, said in June its foreign exchange hedging cost will likely be "slightly above" 85 basis points for this year, higher than 68 basis points in 2010. Cathay Financial added it remains committed to reducing the cash proportion of its overseas investment portfolio in order to boost overall returns, but the recent volatility in financial markets may delay the process. The bank said its cash holdings fell to 11.3% of its total portfolio in the second quarter, from 12.5% in the first quarter. -By Aries Poon, Dow Jones Newswires; 886-2-25022557; aries.poon@dowjones.com

Source