CASE STUDY
FX Portfolio Management
Multi Currency Investment Vehicle
MCI product was designed to eliminate exchange rate risk from the investments in multiple currencies which were managed in another currency where the assets were actually held. On the front end, the subscriptions and redemptions were entered in the currency of choice and that resulted in money transfer trade tickets which the operational systems used to advice of receipt and make payments. The amounts held the multiple currencies are then converted to a single currency where the investments are made. These are done through overnight FX Swaps which removed exchange rate risk and also transfer the yield curves to the respective currencies. These overnight swaps pools the monies in different currencies to a single currency which is subsequently remitted to the investment vehicle for investment in real assets. On a regular basis, since the money goes out and comes back in the same day, only the difference is transferred through a money transfer to the investment vehicle.
The swaps were uneven to take into account the expected gain overnight from the investment, so the principal and majority of the gain was completely hedged and only the forecast error was exposed to currency risk. This was however minimal because the errors were not in the same direction every day.
Currency Overlay Management System
Safeport is a Currency overlay program that implements a dynamic hedging strategy on foreign currency exposures of underlying assets. The overlay manager wanted a new system to manage all their accounts including the calculation of the hedge ratios and resulting trade changes to each of the different strategies applied to the various exposures in each of their accounts.
We analyzed the whole process that they used and divided the data into 3 groups. One group of data was account information that was generic across various strategies. The second group of data was strategy information that specified how each strategy was supposed to be applied. This was specific for each kind of strategy in place for each exposure in each account. The third kind of data was the financial information that was recorded as a result of executing the strategies. Once the process and the rules were inferred, the whole system was built in a matter of weeks and put into parallel test environment for a period of 1 month. Following this the system was put into production.
