Conflict and crisis: Managing financial market risk in uncertain times

Niall Coakley, Head of Corporate Risk Solutions, Lloyds Corporate & Institutional
Colin McKee, Head of Financial Risk & Accounting Advisory, Lloyds Corporate & Institutional

Conflict and crisis:
Managing financial market risk in uncertain times

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While varied in nature, the succession of global events of recent years has served as a reminder of how quickly external uncertainty can translate into financial market stress. For corporate treasurers, these events have reinforced the need for disciplined – yet flexible – treasury frameworks that allow risks to be identified, measured and actively managed in uncertain markets. But what does a robust risk management framework look like, and how can treasurers prioritise resilience against a backdrop of volatility?

Niall Coakley,

Head of Corporate Risk Solutions, Lloyds Corporate & Institutional

Colin McKee,

Head of Financial Risk &
Accounting Advisory, Lloyds Corporate & Institutional

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Rewriting the risk playbook

Some of the most immediate market impacts of the Middle East conflict have been the sharp increases in oil, fuel and broader energy prices, alongside concerns over supply disruption and the potential widening or prolongation of the conflict. Between the end of February and the end of April 2026, spot Brent crude prices rose by over 55%¹, with UK and EU gas prices increasing sharply and jet fuel prices almost doubling. Markets have reacted rapidly to headlines on an intra-day basis, leaving many previously defined stress scenarios looking outdated.

While companies with significant oil and fuel input costs, such as airlines, may have entered this period with substantial hedge cover already, they are now facing a fresh set of challenges. The risk of fuel shortages, for example, may lead to service disruption and uncertain volumes. They are also facing decisions over whether to continue programmatic hedging at elevated price levels, and how best to do so in light of counterparty credit limits, how best to do so in light of counterparty credit limits where existing hedges are significantly in-the-money.

[Graph placeholder - update on 08 May, or replace with image]

_{¹Bloomberg data}

Click the graph to zoom

Chart 1: Will oil prices remain elevated in six months?

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Companies for whom commodities represent a smaller proportion of total costs are also feeling the impact and we have seen a range of responses. Some firms have been closely monitoring price movements while awaiting greater clarity on how the conflict evolves. Others have been hedging energy costs for the first time in several years or increasing existing hedge ratios to protect against further price escalation.

These approaches highlight the balancing act between risk and reward faced by treasurers – remaining unhedged or under-hedged only to see future prices increasing should the conflict worsen; or locking in historically high prices now only to see future prices fall back if conditions normalise. As ever, it can be beneficial to focus on reducing risk at an acceptable cost rather than trying to time the markets perfectly.

Conversely, producers of oil, gas and power have been grappling with liquidity pressures generated by out-of-the-money hedges. In many cases, these have required margin payments to be made to exchanges or the posting of cash collateral to bilateral counterparties, creating significant short-term cash demands even as underlying price dynamics have been favourable. This requires companies to carry additional liquidity, even if it’s not needed, or to look for more tailored liquidity solutions.

All of this underlines a familiar but important lesson: commodities remain among the most volatile asset classes to which corporates are exposed. Even when energy or commodity costs represent a relatively small share of the overall cost base, sharp price swings can have a disproportionate impact on earnings and cash flow. Well-structured hedging programmes designed to smooth volatility can therefore play an important role in protecting financial performance.

Higher interest rates: here to stay?

Interest rate markets have also been highly volatile since the onset of the conflict in the Middle East in February. Market rates have risen sharply, while shifts in inflation expectations have led to rapid repricing of central bank paths. Forecasts of imminent rate cuts have reversed, and in some cases been replaced by expectations of hikes.

This uncertainty has left many corporates questioning whether current rate levels represent a new structural norm or a temporary dislocation that could unwind if conditions stabilise. As a result, some treasurers have been reluctant to lock in borrowing costs at what are perceived to be elevated levels. Where balance sheets allow, a ‘wait and see’ approach has been adopted, maintaining the existing interest rate and currency mix of debt while markets are closely monitored.

However, for companies facing near-term maturities, refinancings or new funding requirements, this level of flexibility may not be an option.

In these circumstances, a range of strategies has emerged. These include shortening the tenor of new borrowings and associated hedging to avoid locking in higher rates for extended periods, and averaging into rates over time – either through pre-hedging, or by initially swapping new issuance to floating, with a view to re-fixing rates over time to potentially achieve a lower yield.

For some companies, treasury teams have been actively pre-hedging interest rates ahead of future funding dates – not so much to average into rates over time, but to protect against the risk of a further increase in rates, an outcome that would impact the economics or indeed viability of investment opportunities. This is particularly key where companies have budgeted funding rates which have been approved by the board.

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Outside immediate financing needs, some companies have been taking advantage of higher yields and increasing the proportion of floating rate debt by adding swaps to floating. In such instances, this had often been a strategic objective of the company, but inverted interest rate curves had previously proved unattractive. The sharp increase in yields – particularly in GBP, where 10-year yields hit their highest level since 2008 – has offered a tactical opportunity to execute this strategy, especially for treasurers who may feel that market expectations of future rate hikes may be overdone.

In the interest rate option market, volatility increased significantly in March 2026, increasing the cost of buying protection using options. However, even with increased premiums, we have seen companies purchasing out-of-the-money interest rate caps to protect against short term rates spiking further – for example, to mitigate the risk of covenant breaches. Some have sought to reduce the cost of protection by entering into interest rate collars rather than caps, in which they give up favourable movements in rates below a ‘floored’ level.

Further still, some companies have been taking advantage of increased volatility levels to reduce the cost of locking in interest rates by giving the right to the bank to cancel the swap after a certain period of time. While such a strategy may not be right for all companies, increased option premiums can offer a significant reduction in the overall fixed rate achieved.

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Which financial consequence of geopolitical uncertainty is most challenging for treasury teams to manage?

Managing commodity and energy price risk
Navigating interest rate volatility
Managing FX exposure
Maintaining liquidity and funding flexibility
Responding to market shocks and volatility
Assessing and modelling risk scenarios

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Fast-moving markets, flexible hedging

In contrast to commodities and interest rates, foreign exchange (FX) markets have so far reacted in a more measured way. Many G10 currency pairs have traded within relatively narrow ranges, and the safe-haven rally in the US dollar seen at the early stages of the conflict has largely reversed.

That said, the risk of sharp peaks and troughs driven by news flow remains elevated. Volatility in yield curves has translated into volatility in forward points, which treasury teams should monitor closely. In some cases, favourable movements may present opportunities to increase hedge cover or extend hedge tenor at attractive levels.

In terms of execution, we have seen increased use of FX orders, allowing hedges to be executed automatically when predefined market levels are reached, without the need for constant market monitoring. Some companies have also been reassessing the relative merits of FX forwards versus options, such as risk reversals. Where outright forward rates are above current spot rates due to unfavourable interest rate differentials, pricing in the option market can mean that risk reversals offer the opportunity to share in enhanced potential upside movements while offering capped downside protection. Whatever the chosen approach, FX policies should prioritise flexibility and agility to respond to fast-moving markets and shifting economic forecasts.

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Resilience favours foresight

Global events over the past decade are a systemic indication that the operating environment has fundamentally changed in the long term. In this environment, a robust risk management framework is essential. Treasury teams should review policies to ensure they remain fit for purpose and provide clear guidance. This includes having analytical tools in place to quantify sensitivities and scenario impacts, and determining in advance how the fixed-floating and currency mix of debt, and transactional hedging, might be adjusted should market rates move through predefined levels.

Equally important is governance. Decision-making structures must be agile enough to allow hedging actions to be taken at speed. Delegated authority, operating within clearly defined guardrails, can enable treasury teams to respond quickly to changing market conditions and to take advantage of opportunities before they pass.

Lloyds continues to work closely with clients to review and enhance treasury policies, provide market insight, and deliver cross-asset analysis to help quantify the potential impact of market risks on cash flows and key financial metrics. With extensive experience supporting clients through changing market cycles, we are well positioned to help corporates build resilience into their operating models.