Insights Articles
Articles: short and practical.
Compact articles on single questions of FX risk management. They grow out of our work with treasury teams and appear first on LinkedIn, for discussion.
Correlation explained: 5 questions for treasurers
For treasurers and finance leaders with cash flows in several foreign currencies. The LinkedIn series accompanying the whitepaper “Correlation in Treasury Hedging”: five short articles on why the interplay of currencies decides your actual risk.
Read the series →- 01Why is your currency risk smaller than the sum of its parts?
- 02What is left of diversification when correlations break down?
- 03Why does your cash flow at risk depend on the correlation matrix?
- 04What is implied correlation, and what does it do for treasury?
- 05What does the gap between implied and historical correlation tell you?
What does the gap between implied and historical correlation tell you?
The most interesting number in a correlation panel is the gap: between what happened and what the market is pricing now.
What is implied correlation, and what does it do for treasury?
Your correlation matrix looks back. The market looks ahead.
Five good reasons to postpone your FX risk review
“We are in the middle of a transaction.” “We are focused on the quarterly close.” “Our bank already takes care of it.” All legitimate. None is a good reason to wait.
Why does your cash flow at risk depend on the correlation matrix?
The simulation is not the problem. The stale matrix is.
What is left of diversification when correlations break down?
Same portfolio as in part 1. Calm market: EUR 7.0m of risk. Stress phase: EUR 11.4m. Nothing about the positions changed.
Why is your currency risk smaller than the sum of its parts?
An example with three positions: EUR 15m added up one by one, EUR 7m as a portfolio. The difference is correlation.
Budget rate: where should sales and finance start?
Every autumn, sales and finance sit down at the same table to set next year’s budget rates. They rarely agree.
In hindsight, every hedge is wrong. How do you defend the decision?
“It was obvious it was neither the right time nor the right strategy to hedge.” How often have treasurers and CFOs heard that line?
Rear-view mirror or windscreen: how does your system measure FX risk?
Thirty years on an FX desk teach you one thing: most risk systems show how high the risk was yesterday. Not how high it will be tomorrow.
ISA 570: how do you prove your currency risk is under control?
The revised auditing standard ISA 570 changes how going concern is assessed, and with it the kind of evidence a company must be able to provide on currency risk.