Currency risk management likely to remain prominent
abu dhabi — The Abu Dhabi Chapter of the Institute of Chartered Accountants of India, or ICAI, recently held a professional development event, which witnessed a large audience of chartered accountants and other leading dignitaries invited for the event. The chairman of ICAI Abu Dhabi, Padmanabha Acharya, inaugurated the seminar by informing the members on key developments taken place recently.
Acharya pointed out that emerging market currencies generally lost ground against the US dollar in the first three quarters of this year. Due to the current circumstances in the US, some of these currencies have strengthened in the last fortnight. However, given the volatility in the global markets, currency risk management will remain a primary focus.
The Seminar was addressed by Donald G. Feeney, managing director and senior portfolio manager at Mesirow Investment Management Partners (MIMP), the newly established joint venture between $70 billion Chicago-based Alternatives Manager Mesirow Financial and Abu Dhabi-based Sovereign Wealth Fund Mubadala.
To portray the journey of the cur- rency over the decades, Feeney briefed the historical prospective of currency. He clarified that the risk is not due to the currency itself but it’s the foreign exchange of currency that creates the risk. Based on historically information available, origination of currency goes back to 7th Century BC. In ancient age as well, gold and silver were used for international trading and payment; and this formally turned into a gold standard around 1875. The gold standard broke down with the World War I, and due to the developments in the global market, US began currency float in 1971.
He added that the currency risk is not primary focus of the business deals but it’s a by-product while entering into an international trade or exchange. Whether money floats beyond border, or investors make investment in other countries, a need to exchange currency arise, and consequently, they acquire currency risk.
Feeney admitted that there cannot be a definite definition to explain the fluctuation in the currency but there are few drivers of foreign exchange prices such as interest rate differentials, fiscal policy, global growth, news, quantity of buyers/sellers among others factors globally.
Moving towards the currency solutions, he mentioned that by nature, there are three ways to deal with currency risk i.e. ignore, mitigate or manage. Feeney described passive and active management of currency risk. He emphasised that passive management does not mean that you have to hedge a 100 per cent of the transaction value but it’s now a strategy to move towards optimal from sub-optimal passive hedge. An active strategy, however, takes a position on market direction and seeks to profit while keeping risk at a minimum. As another solution, he explained the Adaptive Proxy Hedging which is intended to provide a superior solution that may effectively mitigate currency risk in a cost-effective, transparent and liquid manner. The goal of Adaptive Proxy Hedging is to provide a hedging vehicle solution that closely tracks the exchange rate of the underlying emerging market currency.
Towards conclusion of the event, Regional Director of ICAI, James Ravi handed over the certificates to 16 successful candidates who cleared first batch of International Financial Reporting Standards (IFRS) Examination held in Abu Dhabi.