MARCUS FERNANDES Senior Vice President Currency Portfolio Manager - - PowerPoint PPT Presentation

MARCUS FERNANDES

Managing Foreign Currency Risk in a Global Portfolio: Breakfast Briefing Senior Vice President Currency Portfolio Manager Mesirow Financial Currency Management

• Context for Euro‐based investors
• Current market drivers
• Risk management considerations
• Regulatory Update

Currency Risks and Opportunities ‐ Overview

EUR vs USD

Source: Bloomberg 0.8 0.9 1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 EURUSD

EUR vs GBP

Source: Bloomberg 0.6 0.7 0.8 0.9 1 EURGBP

Central bank policy

1 2 3 4 5 6 7

BoE ECB Fed

Source: Bloomberg

• US election outcome and implications for US economy
• Speed of structural divergence in global rates
• Article 50 clarification and timing
• China economic growth

Other near‐term drivers

• At its simplest, currency hedging involves locking in the future

exchange rate at which you can sell foreign assets and bring the money home into EUR

• With the future rate set, you aim to protect yourself from

exchange rate fluctuations

• When the value of EUR rises, you want to be hedged
• When the value of EUR falls, you want to be unhedged

The quick basics

• Currency interaction with the wider portfolio

– Underlying Asset Classes

• Equities
• Fixed Income
• Illiquid Investments
• Emerging Markets

Risk management considerations

• Unhedged position (Do Nothing)

– Currency risk not significant to the overall portfolio – Diversification benefits of unhedged position

• Passive Risk Management

– Manage unwanted volatility, take advantage of long term structural bias

• Active Risk Management

– Add to returns, adapt to changes, provide downside risk protection

Currency risk management approaches

Passive example

Source: Bloomberg ‐80.00% ‐60.00% ‐40.00% ‐20.00% 0.00% 20.00% 40.00% 60.00% 80.00% 100.00% MSCI World (Local) MSCI World (EUR) MSCI World (100% EUR Hedged)

A quick active tour: Value, Trend & Carry

Source: Bloomberg 0.8 0.9 1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 EURUSD

• The FX market is still the biggest market in town

– Average daily turnover: $5.1 trillion per day – Slightly smaller in size than 3 years ago – Less speculation, more hedging – Staffing levels on trading desks are smaller due to a combination of less speculation and more technology

• FX forwards in Europe (EMIR) will need to be collateralised

– Currently March 2017

• MiFid II reporting is on the way and FX forwards will be a part of this as we push

toward greater regulatory oversight, Currency managers will have to demonstrate their commitment to transparency

The market, upcoming regulatory reform

• Currency Wars
• The risk of competitive devaluations
• Volatility

Final Thoughts