FX Risk - Hedging and Accounting

Transcription

1 FX Risk - Hedging and Accounting Tuesday, November 19, 2013 at 9 am U.S. Eastern Time/2 pm GMT David Wilson, Treasury Project Management Expert Prof. Moorad Choudhry, Mathematical Sciences, Brunel University Andy Stalmanis, Dir. Market & Liquidity Risk, TSB Bank Moderator: Alex Voicu, PRMIA, Director of Education Audio: Use your microphone and speakers (VoIP) or call in using your telephone. Direct your questions to Staff via the Questions or Chat pane. To access this webinar audio via the internet, select Mic & Speakers under your Audio pane. Check that the audio on your computer is on and the volume is turned up. For technical assistance contact the Citrix webinar utility customer number: This material is the intellectual property of the presenter and shall not be reproduced or used without the express written permission.

2 1. 2

3 Why are we really hedging FX Risk? Transaction Hedging Competitive Hedging Net Investment Hedging

4 2. 4

5 FX Risk Management Issues ACT Webinar 19 November 2013 Professor Moorad Choudhry FCSI Department of Mathematical Sciences Brunel University

6 Highlights o FX risk management for corporates should be just that: managing risk is removing uncertainty o Primary objective to remove uncertainty and fix costs / exposure not a profit target or scope for speculation o Derivatives valuation is being impacted upwards by issues such as FVA, increased cost of collateral, etc the cost of hedging will increase. This plus use of CCPs suggests reduction of exotics in favour of vanilla derivatives o To hedge or not to hedge: currency mean reversion implications for implementing an FX hedge 2013 Moorad Choudhry ACT Webinar Nov

7 Reference o Choudhry, M., The Principles of Banking, Singapore: John Wiley & Sons 2012, chapters Moorad Choudhry ACT Webinar Nov

8 DISCLAIMER The material in this presentation is based on information that we consider reliable, but we do not warrant that it is accurate or complete, and it should not be relied on as such. Opinions expressed are current opinions only. We are not soliciting any action based upon this material. Neither the author, his employers, any operating arm of his employers nor any affiliated body can be held liable or responsible for any outcomes resulting from actions arising as a result of delivering this presentation. This presentation does not constitute investment advice nor should it be considered as such. The views expressed in this presentation represent those of Moorad Choudhry in his individual private capacity and should not be taken to be the views of his employer or any other affiliated body, including Brunel University or YieldCurve.com, or of Moorad Choudhry as an employee of any employer or affiliated body. Either he or his employers may or may not hold, or have recently held, a position in any security identified in this document. This presentation is Moorad Choudhry No part of this presentation may be copied, reproduced, distributed or stored in any form including electronically without express written permission in advance from the author Moorad Choudhry ACT Webinar Nov

9 Hedging FX Risk Andy Stalmanis Director of Market & Liquidity Risk November

10 3. 10

11 Nature of the risks to hedge Some possibilities; Funding in the currency of the business that revenue is earned in and/or assets have been purchased in Forward FX to hedge firm inflows and outflows Time options? Use of cross currency swaps for currency debt issued Currency options Criticality of the economics and costs should drive the hedging decisions... plus risk appetite 11

12 FX booking and risk measurement Ideally book currency transactions in their underlying currency in the ledgers Confirmation of all hedge transactions Regular valuation Capability to report the FX risk exposures Demonstrate hedge effectiveness - IAS 39 Setting limits when currency flows are regular or hedging is not micro 12

13 Costs of hedging/use of derivatives Criticality to the entities profitability Transaction cost use of options and exotics Costs reflect the cost of eliminating uncertainty Liquidity of the product provided the longer the maturity, the wider the bid-offer spread The cost of capital and credit risk on your firm will be reflected in the cost of transactions Ways to reduce cost; natural hedges vanilla products are cheaper use of break clauses transacting on a collateralised basis setting a risk appetite at a level to optimise transaction costs whilst still hedging the material risks Spot 3m Fwd 1y fwd GBP/USD $ $ $ Cost for client to buy GBP 1m European Option (Strike = ATM forward) (Cost - 14k) $ (Cost - 31k) $

14 Historic market movements 14

15 Historic market movements 15

16 Questions for the Presenter? Send them via the Question Pane in the webinar utility panel on the right hand side of your screen 16

17 Thank you for attending this PRMIA Webinar! Please go to PRMIA s website atwww.prmia.org. Click on Webinarsunder the Trainingtab to find more upcoming thought leadership webinars. Also, click on the Membership tab for information on joining PRMIA as a sustaining member. 17