PASSIVE CURRENCY HEDGING

A cost-effective and operationally efficient strategy designed to reduce or eliminate international currency risk.

Characteristics

Reduces embedded currency exposure in international asset portfolios by selling foreign currency exposures in the forward foreign exchange market versus the base currency.

As a result, risk emanating from embedded currency exposures is mitigated or eliminated depending upon whether the passive hedge is partial or full.

Passive currency hedging can be applied to developed and emerging markets' foreign exchange exposures. Programmes are implemented using OTC FX Forward contracts.

Cash flows result from the roll-over of hedges depending on the tenor of the hedges (typically monthly or quarterly).

Approach

Millennium Global offers significant experience and expertise in passive currency hedging. Our service includes:

Advising clients on currency hedging policies that address client risk management objectives and portfolio structuring.

Providing transparent and efficient foreign exchange execution through a panel of approved counterparties.

Managing cash flows that arise from passive currency hedging and overseeing collateral requirements.

Setting up operational workflows using proprietary currency management systems.

Mitigating cash drag, through the use of laddering, tenor management and equitisation strategies.

Benefits

Currency exposures are continually monitored and managed.

Established operational workflows and proprietary systems provide efficiency in the implementation of passive hedging programmes.

Best execution is achieved thereby minimising the costs of the passive hedge.

The impact of foreign currencies on the returns of international assets is reduced.

The total volatility of returns in portfolios exposed to international assets is reduced.

Further insights

Is There an Optimal Hedge Ratio?

When determining hedging policies, investors often consider if there is an optimal hedge ratio that can be established and left unchanged.

In practice, given the cyclical nature of currency markets and movements in FX exchange rates the optimal (or most beneficial) hedge ratio will always be period dependent and will change over time.

Our optimal hedge ratio case study assesses the effectiveness of different hedge ratios and the optimal hedge over the past 30 years.

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