Fund managers make decisions on the size of their exposure to foreign exchange risks based on the risk approach previously agreed for the fund. This usually means one of the following policies will apply:
- No hedging – investors are completely exposed to foreign currency movements
- Hedge all currency risks – investors are insulated from any losses incurred through foreign exchange rate movements
- Manage the FX exposure – this might require covering 50% of the exposures and leaving 50% unhedged
- Manage the FX exposure by market segment – for example cover 100% of foreign currency bond investments but leave foreign currency equity positions exposed to rate movements
It is clear that there are many variations in the approach used by fund managers and forward outrights are an important and useful risk management tool.
Topic 2: Using FX Swaps
- Use of FX Swaps to Manage Cash Flows
- Other Uses of FX Swaps
Use of FX Swaps to Manage Cash Flows
FX swaps may be used to manage future cash flows in foreign currency.