Google Inc. is depending on hedging against fluctuations in exchange rates to prevent international profits from Web search ads and YouTube videos from evaporating.

The owner of the most popular Internet search engine used hedging to net a $34 million gain that helped offset potential negative effects to third-quarter revenue resulting from the dollar's 20 percent rebound from a record low against an index including the euro and pound. The dollar's 2 1/2-year slide had been a boon to Google, which in the first quarter began drawing more than half its revenue from outside the U.S.

``Our hedging programs are in fact working well,'' said Chief Financial Officer Patrick Pichette during Mountain View, California-based Google's Oct. 16 conference call, following the announcement that profit climbed 26 percent to $1.35 billion, beating analysts' estimates. ``Clearly the currency was working against us in this quarter.''

U.S. corporations boosted foreign-exchange hedging this year as the dollar rallied and the global credit crisis led to increased currency swings. The percentage of 2009 foreign income hedged by U.S. corporations rose to 55 percent in September, from 33 percent in June and 6.7 percent in April, according to a JPMorgan Chase & Co. survey of clients. The September share was the highest since the bank began the quarterly canvass in 2005.

``The combination of higher currency volatility and the dollar's turn are motivating greater hedging,'' said John Normand, head of global currency strategy at JPMorgan in London. ``U.S. investors and corporations, who have been unhedged over the last few years, accrued windfall gains as foreign currencies appreciated. They stand to give back significant currency gains accrued since 2002 if they do not hedge.''

Quarterly Survey

Google is hedged against declines in the euro, the Canadian dollar and the pound, its biggest currency risks, Pichette said.

``Over the coming year we will roll out incremental hedges to cover much of the remaining exposure,'' he said.

JPMorgan's most recent quarterly corporate hedging survey was conducted from Sept. 9 to 15. A total of 93 clients from the U.S., the euro region and Japan responded, holding a combined market capitalization of $1.66 trillion. Client names and responses were kept confidential.

The Dollar Index traded on ICE Futures in New York, which tracks the greenback against the currencies of six major trading partners, climbed to 85.921 today, the highest level since November 2006, after reaching 70.698 on March 17, the lowest since its 1973 inception.

Overlay Programs

Since July 15, when the dollar reached an all-time low of $1.6038 against the euro, it has gained 20 percent to $1.2855. The dollar has appreciated 19 percent to $1.6334 against the pound and 24 percent to 1.2420 Canadian dollars.

Swings in exchange rates can affect profits for corporations and investors when they convert revenue from abroad into their home currency. Revenue in a foreign currency is lower when converted into dollars after the greenback appreciates.

Implied volatility on one-month dollar-yen options, a measure of expectations for currency moves, was 22.49 percent today after reaching 32.18 percent on Oct. 10, the highest since at least December 1995, when Bloomberg data begin.

Increased hedging demand and movement in currencies has triggered a rise in assets under management in firms that specialize in so-called foreign overlay and alpha programs. Overlays generally focus on mitigating foreign-exchange risk embedded in an international portfolio of equities or bonds, while alpha programs also seek to add returns to a fund.

Dollar Strength

``There has been a huge amount of interest and monies going into either foreign-exchange overlay or alpha strategies,'' said Virginia Parker, chief executive officer of Parker Global Strategies LLC, whose Stamford, Connecticut-based company farms out money to hedge funds. ``There is so much global investing now, and we've had a situation with dollar strengthening.''

Currency overlay and alpha funds assets under management rose 21 percent to $46.5 billion as of August from the beginning of the year, according to an index of these funds tracked by Parker Global. The assets in the index, which currently tracks 77 funds, totaled $34.1 billion a year ago.

Companies in the Standard & Poor's 500 Index drew 49 percent of their sales from outside the U.S. as of May 2007, up from 30 percent in 2001, according to New York-based S&P, whose index includes the biggest corporations.

London-based Millennium Global Investments Ltd., a hedge fund that runs currency overlay and alpha programs, had an increase of $2 billion in the last three months in the funds it oversees to $15 billion.

``There is now more discrimination of risks among various countries, and thus in exchange rates, in this current environment,'' said Alan Eisner, senior managing director and head of currency management at Millennium. ``More people therefore want to have an overlay program.''

Source:Bloomberg