The Mecklai FX Hedge Program
|
|
07 - 08 |
08 - 09 |
09 - 10 |
|
Unhedged
|
40.15
|
46.47
|
47.40
|
|
Fully hedged
|
46.01
|
40.84
|
47.49
|
|
50% hedge
|
43.08
|
43.65
|
47.44
|
|
Export |
|
Mecklai Rate(Exp)
|
44.81
|
44.83
|
49.17
|
|
Benchmark rate
|
44.86
|
39.82
|
46.30
|
|
% gain over unhedged
|
11.61
%
|
-3.53
%
|
3.74
%
|
|
% gain over fully hedged
|
-2.62
%
|
9.77
%
|
3.54
%
|
|
% gain over 50% hedged
|
4.01
%
|
2.70
%
|
3.64
%
|
|
% gain over benchmark
|
-0.11
%
|
12.58
%
|
6.19
%
|
|
Import |
|
Mecklai Rate(Imp)
|
43.08
|
41.28
|
47.61
|
|
Benchmark rate
|
47.16
|
41.86
|
48.68
|
|
% gain over unhedged
|
-7.30
%
|
11.17
%
|
-0.46
%
|
|
% gain over fully hedged
|
6.38
%
|
-1.08
%
|
-0.26
%
|
|
% gain over 50% hedged
|
0.00
%
|
5.43
%
|
-0.36
%
|
|
% gain over benchmark
|
8.65
%
|
1.39
%
|
2.19
%
|
|
|
The Mecklai FX Hedge Program is designed to ensure a pre-set benchmark is
protected in virtually any market environment, and to enable capture of some opportunity
in the market. It enables creation of a safe portfolio and, importantly, can save
considerable management time, particularly if implemented with discipline.
Running this program requires the following steps
- Defining your risk profile – will you be managing imports and
exports separately or a net book; to what tenor will you identify risk
- Setting the benchmark rate for risk management – this should
be set as a percentage of the first day forward rate so that any fresh exposures
that come in are automatically built into the system without spending unnecessary
additional time; of course, specific exposures that carry very tight margins can,
and sh0uld, be built into the benchmark at their own particular rates
- Setting progressive hedge levels to lock in opportunity gains
– missing opportunity is often one of the main reasons for poor performance in FX
(or, for that matter, any) markets
- Implementing a 25% minimum hedge – the program will signal whether
this hedge is to be taken with forwards or plain vanilla options, and if options,
what should be the strike price; note that this minimum hedge needs to be put in
place on Day 1 and on any day when new exposures are brought into the risk profile
- Monitoring the MTM daily and hedging when
- The risk-adjusted MTM breaches the benchmark rate; we use a
risk-adjusted MTM as an advance warning so that even this hedge will usually be
better than the benchmark, or when
- The MTM triggers a lock- in level
The treasury can use its own judgment and market views any time the program does
not signal action. The hedging rules listed above can, of course, be modified depending
on your specific business circumstance, but the program will deliver best results
if it is followed with discipline over at least 12 months
- Ensures virtually 100% certain protection of benchmark rate
- Creates a safe portfolio
- Provides a measure of treasury performance; the program usually
captures a reasonable amount of opportunity, despite not using any market view –
this enables assessment of the real value added by an active treasury
- Saves considerable amount of management and operations time
and mind space
- Often results in better accounting performance, since at least
25% of the hedges are by plain vanilla options
- Controls but does not eliminate the accounting loss (or gain)
- Requires some upfront investment of management time, whether
in setting up and running an in-house treasury or in managing the activity of an
outsourced agency; once set up, the program is easily institutionalized
We have successfully implemented this approach in close partnership with some of
our clients. Please contact outsourcedtreasury@mecklai.com to
schedule a presentation |