Asset Management Solutions

Protect your margin before markets move. FX can erase profit fast. Keep it simple with these seven steps: 1. See it ➞ Make a list of every FX cash flow. ➞ Currency, amount, date, in or out. 2. Hold currencies ➞ Open multi-currency accounts for top markets. ➞ Collect locally and convert when you choose. 3. Set a budget rate ➞ Pick one quarterly FX rate with a small range. ➞ If spot exceeds the range, reprice or hedge. 4. Use forwards ➞ Lock a portion of near-term cash flows. ➞ Match maturities to invoice dates. 5. Build natural hedges ➞ Offset inflows with outflows in the same currency. ➞ Pay suppliers or loans in the currency you sell. 6. Price and invoice smart ➞ Quote in your cost currency or add an FX clause. ➞ Shorten terms and offer early payment. 7. Net and time conversions ➞ Net payables and receivables by currency each week. ➞ Convert twice a week using limit orders. You cannot control financial markets, but you can manage FX exposures. How do you manage your FX risks? ------- ➕ Follow Jonathan Maharaj FCPA for finance‑leadership clarity. 🔄 Share this insight with a decision‑maker. 📰 Get deeper breakdowns in Financial Freedom, my free newsletter: https://lnkd.in/gYHdNYzj 📆 Ready to work together? Book your Clarity Session: https://lnkd.in/gyiqCWV2

FX & Interest Rate Risk Management Cheat Sheet! 2 critical financial risks treasury teams manage are FX risk and Interest Rate Risk (IRR). If not properly managed, both can erode margins, distort earnings, and create instability in cashflow planning. Learn more: https://lnkd.in/gwSMHnRG Here is a concise framework you can use: 1. Foreign Exchange (FX) Risk Key FX Risk Types • Transactional FX Risk – Exposure from future contractual cashflows such as imports, exports, accounts receivable, and accounts payable. Impact: Margin volatility and cashflow uncertainty. • Translational FX Risk – FX impact when consolidating financial statements of foreign subsidiaries. Impact: Earnings volatility in the balance sheet and income statement. • Economic FX Risk – Long-term impact of exchange rate movements on competitiveness and pricing strategy. Impact: Potential market share erosion. Measurement & Monitoring You can track exposure using tools such as: • Net Open Position (NOP) – aggregate currency mismatch across inflows and outflows. • FX Sensitivity Analysis – EBITDA impact from ±5–10% currency movements. • Scenario Modeling – base, worst, and best exchange rate scenarios. Operational Mitigation (Natural Hedging) Before using derivatives, you can reduce exposure through: • Currency matching of receivables and payables • FX budget rates for pricing and procurement planning • Local currency settlement strategies • Procurement timing adjustments based on FX trend Financial Hedging Instruments When natural hedges are insufficient, you may use: • FX Forwards – lock in exchange rates for future obligations • FX Options – downside protection with upside participation • Cross-Currency Swaps – exchanging one currency for another Strong governance is essential, including hedge ratio policies, counterparty monitoring, hedge effectiveness testing, and board-approved FX policies. 2. Interest Rate Risk (IRR) Interest rate volatility affects borrowing costs and investment returns. Key IRR Types • Repricing Risk – mismatch between asset and liability maturities • Yield Curve Risk – changes in short- vs long-term rates affecting refinancing costs • Basis Risk – mismatch between benchmark indices (e.g., SOFR vs Prime) • Optionality Risk – early repayment or prepayment risk affecting expected cashflows Measurement Tools Treasury teams typically use: • Interest Rate Gap Analysis • Duration Analysis • Stress testing using ±100–200 bps scenarios IRR Hedging Instruments Common tools include: • Interest Rate Swaps – convert floating debt into fixed rates • Interest Rate Caps – set maximum borrowing cost • Interest Rate Floors – protect minimum investment returns • Collars – combine cap and floor for cost-controlled protection Treasury is really about protecting enterprise value from financial market volatility while maintaining stable margins and predictable cashflows. 📌 Repost & Share!

Financial Derivatives: A financial derivative is a financial contract whose value is derived from the value of an underlying asset, such as shares, bonds, currencies, commodities, interest rates, or market indices. Derivatives are used by investors, companies, and financial institutions to manage risk, earn profits, or protect against future price fluctuations. Features of Financial Derivatives Derived Value 1)The value of a derivative depends on the underlying asset. 2)Future Settlement Contracts are usually settled on a future date. 3)Risk Management Tool Helps reduce financial risk through hedging. 4)Leverage Small investment can control large amounts of assets. Transfer of Risk 5)Risk can be transferred from one party to another. Types of Financial Derivatives 1. Forward Contract A private agreement between two parties to buy or sell an asset at a future date at a predetermined price. Example: A farmer agrees to sell wheat after 3 months at a fixed price. 2. Futures Contract A standardized contract traded on stock exchanges to buy or sell assets at a future date. Example: An investor buys gold futures expecting gold prices to rise. 3. Options Contract Gives the buyer the right, but not the obligation, to buy or sell an asset. Call Option → Right to buy Put Option → Right to sell 4. Swaps An agreement between two parties to exchange cash flows or financial obligations. Example: Exchange of fixed interest payments with floating interest payments. Uses of Financial Derivatives Hedging Used to reduce risk from price changes. Speculation Used to earn profit from market movements. Arbitrage Used to take advantage of price differences in markets. Price Discovery Helps determine future market prices. Advantages of Financial Derivatives 1)Reduces financial risk 2)Improves market efficiency 3)Provides leverage 4)Enhances liquidity 5)Helps in portfolio management Disadvantages of Financial Derivatives 11)High risk due to market volatility Complex financial instruments Possibility of huge losses 2)Can lead to speculation and market instability Example of Financial Derivative Suppose a company expects the dollar price to increase after 2 months. 3)To avoid loss, the company enters into a currency futures contract today at a fixed exchange rate. Even if the dollar price rises later, the company can buy dollars at the agreed price. Conclusion Financial derivatives are important financial instruments used for hedging, speculation, and managing financial risks. They play a major role in modern financial markets, but they should be used carefully because they involve high risk and complexity.

Historically, the U.S. dollar’s “safe haven” status has meant that selloffs in risk assets (e.g. equities) have coincided with purchases of U.S. Treasuries and therefore dollars – prompting a stronger dollar. But so far this year, the dollar has fallen alongside U.S. equities more than twice as often as over the prior decade. That’s a breakdown in one of the most relied-on cross-asset relationships. When U.S. equities sell off and the dollar doesn’t rally, the case for running unhedged exposure gets a lot weaker. The recent dollar weakness has reshuffled the FX calculus. This isn’t about making a macro call on the dollar – it’s about understanding how it behaves in a portfolio. Here’s how we’re thinking about it: For non-U.S. investors: High hedge costs aren’t a reason to stay unhedged. With the dollar falling and its correlations breaking down, the risk of doing nothing is rising. Consider a higher hedge ratio, particularly in fixed income. Partial hedges can help manage cost while reducing drawdown risk. For U.S. investors: The math cuts the other way. If you're investing abroad, especially in lower-beta markets (that is, where the assets are less volatile than the market) or defensive currencies like JPY and CHF, unhedged positions may offer more upside. The weaker dollar means FX could be a return lever – not just a risk. By region: European investors are already seeing better return outcomes from FX-hedged U.S. equities. In Japan, high carry still discourages full hedging – but that could change fast if the Fed cuts rates or the BoJ normalizes. Earlier in the cycle, a flat or inverted U.S. yield curve made things worse – forcing portfolio managers to use expensive short-term dollars to hedge longer-dated securities with limited yield pickup. While the curve has recently steepened, it remains relatively flat by historical standards, limiting the appeal of hedging long-duration U.S. bonds for foreign investors. At the same time, steep curves abroad – like in Japan – make holding local bonds more attractive on a relative basis. Those curve dynamics feed directly into FX positioning. We’re already seeing signs of how these dynamics play out in currency markets. The chart below shows that the euro carry index has fallen sharply since the start of the year, suggesting that carry trades funded with euros are no longer working – likely due to a stronger euro or a shift away from USD risk. Meanwhile, the yen carry index is rising, reflecting continued comfort with borrowing in yen to chase higher yields. The divergence underscores a broader market preference for using yen, not euros, as the funding currency of choice. The result? We could see even more volatility in currency markets – and in the returns of global portfolios.

If you’ve worked in ETRM, you’ll relate to this. Real production-grade ETRMs are tough. Trade capture is messy. Downstream wants clean reliable data in fixed formats. Straight through processing always has some "work-arounds". When you try to learn more, most people only understand their own module (not to blame them, their module is also complex and messy!) However, the effect is that very few see the full lifecycle of the trade. So I built a simple, clickable visual of the typical ETRM landscape - end to end. You can click each stage and see what it actually does, who owns it, and where things usually break. This is useful if you’re: – preparing for an ETRM interview – onboarding new hires – explaining the landscape to stakeholders – or just trying to connect the dots yourself If you work in energy trading, this will make sense in 30 seconds. And if you’re new to the space, this will save you months. https://lnkd.in/dWUTP7DU #Learn #ETRM

Lots of AI talk at @ACT this week, and a lot of the buzz was about agents. But the more you give to an agent to do, the more scope it has for misunderstanding and hallucination, so what do you need to know? Here’s some of the thinking behind one of our own AI agents, the FX Hedge Advisor, which meets SOX standards. Specifically, the key things we knew had to be right before we could trust it –as treasurers ourselves. 1. Hedge the right number, or do not bother. Build validations in for completeness, accuracy and cut off amongst others. Before anything else, the tool has to net per currency, filter functional currency entity by entity, handle intercompany properly, and value against today's market. If that picture is not clean and current, every recommendation downstream is built on sand. 2. Ask the question that does not get asked. Most teams default to a forward because working through forwards, layered forwards, collars, options, natural hedges and swaps, per currency, against the company's own policy, takes time no one has. The tool's job is to do that comparison – properly, every time – so the default stops winning by attrition. 3. ‘Best’ has to mean what the treasurer's policy says is best. Not what the model thinks. The treasurer sets the weights in advance: how much the business values P&L certainty, carry cost, working capital impact, permitted instruments, tenor limits, hedge accounting treatment. The tool scores against those priorities. It does not invent them. 4. Client data should never leave the client. Our preferred deployment is inside the client's own environment, using their approved stack and model of choice. The aim is not to move sensitive treasury data into a shared external setup, but to work with the controls the client already has. 5. Check the overall liquidity impact leaves sufficient available liquidity vs policy. Using swaps that roll every month may be cheapest but if a 10% currency shift leaves you short of liquidity, the strategy is the wrong one. 6. Every number has to be defensible. No black box. The maths is shown, the policy checks are explicit, the reasons a structure is rejected are stated. An analyst can walk the treasurer through it line by line, and the treasurer can take the same logic to the audit committee. 7. Compliance built in, not bolted on. Timestamped outputs, version control, operator and reviewer sign-off, a clear audit trail of what was recommended and why. The same discipline supports IFRS 9 hedge accounting analysis, which can be added on and links naturally to the cash flow forecasting work we do elsewhere (current projects underway across clients in Ireland, Switzerland, and the UK). Currency swaps and layered strategies were the gap last time I posted (link in the comments). Both are now in. Happy to show anyone who would find it useful. And would love to hear your thoughts on other functionalities you’d like us to work on.

FX swaps. The instrument every treasurer uses and almost nobody fully prices. An FX swap is two legs (the near leg and the far leg). You sell a currency at spot today and buy it back at a predetermined forward rate on a fixed date. Simple in execution. Not simple in risk. Five things you need to understand before you roll another FX swap book. 1. What it actually is Two simultaneous transactions. Near leg: exchange currencies at today's spot rate. Far leg: reverse the exchange at a pre-agreed forward rate. No net FX exposure on the principal – both rates are locked at inception. What changes is the cost of carry embedded in those forward points. 2. How it is priced Forward points are driven by the interest rate differential between the two currencies, not by anyone's view on where spot is going. If AUD rates are higher than USD rates, AUD trades at a forward discount. You pay that differential to hold the hedge. This is covered interest parity. It is not negotiable. What is negotiable is the bid/offer spread, and that matters more than most treasuries realise. 3. Roll risk: the exposure that builds slowly and continuously Most FX swaps are short-dated – one week to three months. That means the hedge is not a set-and-forget. It is a rolling programme. Each time you roll, you reprice at whatever the forward points are on that day. If rate differentials have moved, your hedging cost has moved. If the market is stressed, your cost has moved sharply. The roll cliff – when a large notional comes due in a dysfunctional market –is where FX swap programmes genuinely fail. 4. Collateral: not as simple as it looks FX swaps sit under ISDA agreements with CSA margining. Variation margin moves with MTM. For cleared trades, initial margin adds a standing liquidity drag. The rehypothecation of posted collateral introduces counterparty credit exposure that sits quietly in the background until it doesn't. Short tenor does not mean zero operational complexity. 5. Where it breaks Dollar shortage events – GFC, March 2020 – push forward points to levels that make hedging economically irrational. Bank counterparties pull lines precisely when notional volumes are highest and alternatives are fewest. A programme built on the assumption of continuous market access is not a hedged programme. It is a programme that works until it doesn't. FX swaps are the right tool for managing short-dated currency exposure. The structure is sound. The risk is in treating the roll as automatic and the cost as fixed. parabellumadvisors.com

Foreign Exchange Risk: Mitigating Uncertainties in Treasury Management Foreign exchange (FX) risk presents a unique set of challenges within the treasury operations of banks, especially those engaged in international transactions. As currency values fluctuate, they can significantly impact the bank's earnings and capital. Understanding and mitigating this risk is essential for maintaining the financial health and stability of an institution operating on a global scale. Treasury departments employ various strategies to hedge against FX risk. One common approach is the use of forward contracts, which allow banks to lock in exchange rates for future transactions, thereby neutralising the effect of adverse currency movements. By securing a predetermined rate, banks can plan their financial strategies with greater certainty and reduce the risk of exchange rate volatility affecting their profitability. Another tool at the disposal of treasuries is currency options. These financial derivatives provide banks with the right, but not the obligation, to buy or sell a specific amount of foreign currency at a predetermined price before a certain date. Options offer flexibility and protection against unfavourable exchange rate movements while allowing banks to benefit from favourable shifts. Natural hedging is yet another technique employed to manage FX risk. This involves offsetting exposure in one currency with exposure in the same or a correlated currency. By structuring operations or assets and liabilities in a manner that naturally offsets currency risks, banks can reduce their need for external hedging instruments, thereby lowering costs and complexity. The management of FX risk is not solely about protecting against potential losses; it is also about identifying and seizing opportunities that currency fluctuations may present. However, it is crucial that banks approach this with a conservative strategy, recognising the volatile nature of the forex market. A well-thought-out approach, combining accurate forecasting and diversified hedging techniques, can help banks navigate the complexities of currency exchange. The importance of FX risk management extends beyond the treasury department; it is a critical component of a bank's overall risk management strategy. A realistic and informed approach to foreign exchange can help a bank maintain financial stability, meet regulatory requirements, and support its international operations effectively. By delving into the intricacies of FX risk and its mitigation strategies, we can gain a deeper understanding of the global financial landscape. This knowledge is beneficial, ensuring that banks remain robust and resilient in the face of currency market volatility.

𝗧𝗵𝗲 𝗠𝗶𝗻𝗶𝗺𝘂𝗺 𝗩𝗮𝗿𝗶𝗮𝗻𝗰𝗲 𝗛𝗲𝗱𝗴𝗲 𝗶𝗻 𝗦𝗶𝗺𝗽𝗹𝗲 𝗧𝗲𝗿𝗺𝘀 𝗖𝗼𝗻𝘁𝗲𝘅𝘁: Long a foreign asset = long the foreign currency When a domestic investor buys an asset denominated in a foreign currency (FC), they are: • Long the asset (e.g., a Japanese bond) • Long the foreign currency (e.g., JPY) 𝗘𝘅𝗮𝗺𝗽𝗹𝗲: a U.S. investor buying a German bond (in EUR) • They are long the EUR bond • Therefore, long EUR / short USD This exposes them to two risks: 1. The market risk of the asset (interest rates, spread, duration, etc.) 2. Currency risk (EUR/USD fluctuations) 𝗢𝗯𝗷𝗲𝗰𝘁𝗶𝘃𝗲: 𝗛𝗲𝗱𝗴𝗲 𝘁𝗵𝗲 𝗰𝘂𝗿𝗿𝗲𝗻𝗰𝘆 𝗿𝗶𝘀𝗸 𝘃𝗶𝗮 𝗠𝗩𝗛𝗥 The Minimum-Variance Hedge Ratio (MVHR) is used to determine the optimal size of the currency hedge (often with FX forwards or futures) in order to minimize the variance of the portfolio expressed in domestic currency. 𝗘𝗺𝗽𝗶𝗿𝗶𝗰𝗮𝗹 𝗲𝘀𝘁𝗶𝗺𝗮𝘁𝗶𝗼𝗻 𝘃𝗶𝗮 𝗹𝗶𝗻𝗲𝗮𝗿 𝗿𝗲𝗴𝗿𝗲𝘀𝘀𝗶𝗼𝗻 MVHR can be estimated by performing a linear regression of the portfolio return (in local currency) on the foreign currency return: 𝗥𝗲𝗴𝗿𝗲𝘀𝘀𝗶𝗼𝗻 𝗳𝗼𝗿𝗺: R_port = alpha + beta × R_FX + error Where: • R_port = return of the foreign portfolio expressed in the local currency • R_FX = return of the foreign currency against the local currency • beta = sensitivity coefficient of the portfolio to FX changes (this is the estimated MVHR) • alpha = constant (not used for the hedge) • error = random noise 𝗜𝗻𝘁𝗲𝗿𝗽𝗿𝗲𝘁𝗮𝘁𝗶𝗼𝗻 𝗼𝗳 𝗯𝗲𝘁𝗮: • beta = 1 → hedge 100% of the FX exposure • beta > 1 → hedge more than 100% (over-hedge) • beta < 1 → hedge less (under-hedge) Analytical formula (derived from beta): Beta = Cov(R_FC, R_FX) / Var(R_FX)   = Corr(R_FC, R_FX) × (σ_FC / σ_FX) Where: • Corr(R_FC, R_FX) = correlation between the asset return and the currency return • σ_FC = volatility of the asset return • σ_FX = volatility of the currency return This analytical “formula” is simply a rewrite of the regression beta. It relies on strong statistical assumptions (stationarity, homoscedasticity, etc.) which are often violated in practice. 𝗪𝗵𝘆 𝗳𝗶𝘅𝗲𝗱-𝗶𝗻𝗰𝗼𝗺𝗲 𝗽𝗿𝗼𝗱𝘂𝗰𝘁𝘀 𝗼𝗳𝘁𝗲𝗻 𝗿𝗲𝗾𝘂𝗶𝗿𝗲 𝗺𝗮𝘅𝗶𝗺𝘂𝗺 𝗵𝗲𝗱𝗴𝗲 (𝗠𝗩𝗛𝗥 > 𝟭) Fixed-income assets (bonds) often have a negative correlation between their return and the foreign currency: 𝗘𝘅𝗽𝗹𝗮𝗻𝗮𝘁𝗶𝗼𝗻: • When interest rates rise in the foreign country: • Bond prices fall → yields rise • The currency may depreciate due to negative economic outlooks • Result: FC return ↑, FC currency ↓ → negative correlation • This increases the variance of the portfolio • To reduce this variance, the statistical model recommends a higher hedge 𝗘𝘅𝗮𝗺𝗽𝗹𝗲: Suppose the regression yields: R_port = 0.001 + 1.25 × R_FX + error Here, MVHR = 1.25 The investor should hedge 125% of the FX exposure.

𝗜𝗱𝗲𝗮 #𝟭𝟲: 𝗠𝗲𝘁𝗿𝗶𝗰𝘀 𝘁𝗵𝗮𝘁 𝗺𝗮𝘁𝘁𝗲𝗿: 𝘁𝗵𝗲 𝗯𝗲𝗮𝘂𝘁𝘆 𝗼𝗳 𝘀𝗽𝗶𝗹𝗹 𝗮𝗻𝗱 𝘀𝗽𝗼𝗶𝗹 I worked with a hotel chain that was focused on two high-level KPIs: 𝗮𝘃𝗲𝗿𝗮𝗴𝗲 𝗿𝗼𝗼𝗺 𝗿𝗮𝘁𝗲 (𝗔𝗥𝗥) and 𝗼𝗰𝗰𝘂𝗽𝗮𝗻𝗰𝘆 (%).  Occupancy was around 80% and had increased year on year but this aggregate average was hiding significant opportunities. When we de-averaged the overall occupancy by hotel and night, we discovered that very few hotels were 80% full: most were either completely full or only half full.  We reframed performance using two “failure metrics” (see illustration): • 𝗦𝗽𝗼𝗶𝗹: measured empty rooms (by hotel, by night). • 𝗦𝗽𝗶𝗹𝗹: measured “lost trading days” when a hotel reached full occupancy too early. By analysing 𝘀𝗽𝗶𝗹𝗹 𝗮𝗻𝗱 𝘀𝗽𝗼𝗶𝗹 𝗮𝘁 𝗮 𝘀𝗶𝘁𝗲-𝗻𝗶𝗴𝗵𝘁 𝗹𝗲𝘃𝗲𝗹, we uncovered significant value: • Spoil caused by pricing too high or insufficient marketing.   • Spill caused by pricing too low or overmarketing.   𝗦𝗽𝗼𝗶𝗹 𝗶𝘀 𝗮 𝗳𝗮𝗰𝘁. 𝗦𝗽𝗶𝗹𝗹 𝗶𝘀 𝗮 𝗺𝗼𝗱𝗲𝗹. One measures what you wasted; the other estimates what you missed.   The principle applies to almost any decision made under uncertainty: where there’s finite capacity and variable demand, there’s always a 𝘀𝗽𝗶𝗹𝗹-𝘀𝗽𝗼𝗶𝗹 𝘁𝗿𝗮𝗱𝗲-𝗼𝗳𝗳.  I’ve applied this framework across a diverse range of businesses: • 𝗖𝗮𝗹𝗹 𝗰𝗲𝗻𝘁𝗿𝗲𝘀: spill = calls with no agents (missed sales); spoil = agents with no calls (wasted labour). • 𝗥𝗲𝘀𝘁𝗮𝘂𝗿𝗮𝗻𝘁𝘀: spill = understaffed hours (poor service); spoil = overstaffed hours (low productivity). • 𝗦𝘂𝗽𝗲𝗿𝗺𝗮𝗿𝗸𝗲𝘁𝘀: spill = missed sales (poor availability); spoil = waste (over-stocking). Every business wrestles with these two-sided costs – the 𝗰𝗼𝘀𝘁 𝗼𝗳 𝗲𝘅𝗰𝗲𝘀𝘀 and the 𝗰𝗼𝘀𝘁 𝗼𝗳 𝗺𝗶𝘀𝘀𝗲𝗱 𝗼𝗽𝗽𝗼𝗿𝘁𝘂𝗻𝗶𝘁𝘆.  Once you measure both, you can manage the balance intelligently.  The best metrics don’t just describe performance – they expose 𝘧𝘢𝘪𝘭𝘶𝘳𝘦 𝘮𝘰𝘥𝘦𝘴 that can actually be fixed. Key takeaways: • Analyse at the most atomic level that could be actionable (hour, site-night, SKU-store, agent, keyword etc.) • Define the acceptable 𝗴𝘂𝗮𝗿𝗱𝗿𝗮𝗶𝗹𝘀 for that atomic outcome.  • Systematically analyse the distribution of performance outside guardrails. • Recognise that averages hide opportunities where good and bad performance offset each other There’s a fascinating 140-year history of optimising these decisions which are commonly referred to as Newsvendor problems – but that story deserves its own post.