Introduction

Often, investors focus on the asset they are investing in, but currency plays a significant role in their wealth. Fluctuations in exchange rates can lead to potential financial gains or losses, especially when investing in assets denominated in GBP (British pound), Euro, or USD or Turkish lira or South African rand and Nigerian Naira. Proper currency management is crucial for achieving investment success.

Our strategies relied on spot and forward rates. We design and  manage currencies, helping hedge the risks and diversify the portfolio exposure to suit the objective of the investment journey.

Hedging Currency Risks

Hedging involves using financial instruments to reduce or eliminate potential losses from adverse currency movements.

What is Hedging?

Imagine you’re planning an outdoor event, and there’s a chance it might rain. To avoid getting wet, you decide to set up a tent. This tent acts as a protective measure, ensuring your event goes smoothly even if it rains. 

In the financial world, this protective measure is called “Hedging.”

Hedging is like an insurance policy for your investments. Just as you’d buy insurance to protect your car or home from unexpected damages, hedging protects your investments from unexpected financial risks.

How Does Hedging Work?

Let’s talk about currency movements. The value of currencies, like the US dollar or the British pound, can go up or down compared to other currencies. If you have investments or assets in another country, changes in currency value can affect the worth of your investment.

For example, if you invest in a business in Germany and the value of the Euro drops compared to your home currency, when you convert your investment back to your home currency, it might be worth less than before.

This is where hedging strategies come in, you can “lock in” a certain exchange rate. This means, even if the currency value changes in the future, your investment is protected at the rate you’ve locked in.

In Simple Terms, Hedging is like setting a fixed exchange rate for your investment. It’s a way to say, “No matter how the currency values change in the future, I want to ensure my investment stays safe and doesn’t lose value because of those changes.”

By hedging currency risks, investors can protect their wealth value from the negative impact of exchange rate fluctuations.

Working with Treasury Houses

In the world of global finance, exchange rates play a pivotal role. They determine how much one currency is worth in terms of another. Now, imagine you’re an investor with assets in different countries. The value of your investments can significantly change based on the prevailing exchange rates. This is where competitive exchange rates come into play.

Maximized Returns: A favorable exchange rate can amplify the value of your foreign investments. When you convert your foreign assets back to your home currency at a competitive rate, you stand to gain more than you would at a standard rate.

Why Partner with Treasury Houses Over Traditional Banks?

Banks are essential financial institutions, but when it comes to currency exchange, they often have higher margins. These margins are the differences between the rate at which banks buy currency and the rate at which they sell it to you. The wider the margin, the less favorable the exchange rate becomes for the customer.

What are the benefits of Partnering with Treasury Houses?

1. Narrower Margins, Better Rates: Treasury houses specialize in foreign exchange and often operate with narrower margins than banks. This means they can offer more competitive rates, ensuring you get more value for every currency conversion.
2. Expertise and Flexibility: Treasury houses have a deep understanding of currency markets. Their expertise allows them to offer tailored solutions, ensuring clients benefit from the best possible rates based on their specific needs.
3. Cost Savings: By offering competitive rates and minimizing margins, treasury houses can lead to significant cost savings. Instead of losing money to the wide margins of banks, investors retain more of their hard-earned wealth.
4. Risk Management: Treasury houses often provide advanced tools and strategies to hedge against currency risks, ensuring clients’ investments are protected against unforeseen market movements.

While banks are a common choice for currency exchange, they might not always offer the best rates due to their higher margins. Partnering with treasury houses provides a strategic advantage, ensuring investors benefit from competitive rates, expert guidance, and significant cost savings.

Explore Case studies with The Financial Engineer

Case Study: Breaking Financial Norms: How We Challenged Conventional Wisdom for Superior Gains

Background:

In September 2022, a client approached us with a specific goal in mind: to diversify her income channels. With a substantial amount of AED in her bank account, she was keen on exploring investment opportunities that would provide her with steady income.

The Challenge:

Typically, fixed income assets, like bonds, are known for generating consistent income but not necessarily for capital appreciation. Our challenge was to not only secure a reliable income source for the client but also to identify an opportunity for potential growth in the asset’s value.

The Strategy:

Given the global currency landscape at the time, we noticed an opportunity with the British pound (GBP). The GBP was undervalued, making it an attractive currency to invest in. We decided to acquire a fixed income bond for the client in GBP denomination, leveraging the currency’s devaluation to our advantage.

To execute this strategy, we turned to our trusted treasury house for the currency conversion. Traditional banks typically have higher margins and fees, and by using our treasury house, we managed to achieve a competitive exchange rate. This decision resulted in a direct saving of 0.35% on the transaction, translating to a substantial 35,000 AED saved on the 1,000,000 AED transaction. This move ensured that we got the best possible exchange rate and showcased the tangible financial benefits of partnering with our treasury house over traditional banking options.

The Outcome:

Fast forward to the present, and the strategy has proven to be a masterstroke. While the fixed income bond continued to provide the client with regular income, the asset’s value appreciated by a whopping 18% due solely to currency appreciation. This means that the client benefits from the bond’s income generation, and she also saw a significant growth in the asset’s value – a rarity for fixed income investments.

Conclusion:

By taking advantage of the currency devaluation and partnering with our treasury house for the currency conversion, we transformed a traditionally income-generating asset into both a productive and growth asset. This strategic move not only met but exceeded the client’s expectations, leading to immense satisfaction. It’s a testament to the importance of understanding global financial landscapes, making informed, strategic decisions, and leveraging trusted partnerships to maximize returns.