What is Currency Management?

Exploring use cases

The impact of currency exposure is felt every time you value your foreign assets. In this episode of Banking & Markets Explains, Marcus Fernandes, Global Head of Currency Management explores how a thoughtful currency management strategy can help mitigate foreign exchange risk in global portfolios. Marcus provides insights on the factors to consider for setting hedge ratios, and how this will vary depending on your goals.

There are many layers to currency management, but at its core I like to think of it as one simple thing: ‘bring the money home’.

When you hold a foreign investment, you are intrinsically exposed to the foreign currency that it is based in. You don’t have a choice in that. You only have a choice in how you choose to manage this exposure.

So, every time you hit your valuation cycle, you typically assess the worth of your foreign investments, priced back to your home currency. You are measured by your ability at that point in time to - bring the money home - whether you intend to do that, or not.

This means that you and your investors feel, and measure, the impact of currency exposure every time you value your foreign assets. At the same time, the impact of your strategy to address this exposure is also quantified.

To be clear, doing nothing about currency exposure is a choice, and a big one at that. It represents one of the two extremes on a spectrum of strategies - that being, allowing your returns to be fully exposed to foreign exchange fluctuations. The other extreme of the spectrum is to fully hedge away as much of these FX fluctuations as possible.

When we think about that spectrum, what we are really thinking about is the hedge ratio, unhedged being zero and fully hedged being 100, with 50% being the aptly named ‘hedge of least regret’.

You have to decide on a hedge ratio, and this defines the goal of Currency Management. Are you looking to minimise volatility? Are you looking to minimise costs? Or potentially, are you looking to be compensated for the intrinsic FX risk you hold? There are many factors to consider, all of which are anchored by the timeframe over which you choose to measure your return expectations.

To understand more about Northern Trust’s currency management solutions please contact us.

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Marcus Fernandes

Marcus Fernandes is the Global Head of Currency Management at Northern Trust Banking & Markets’ Global Foreign Exchange (GFX) business. In this role he is focused on developing GFX’s suite of currency management solutions across the EMEA, US and APAC regions.

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