����vlog���Bվ

We offer tailored FX hedging strategies, including derivatives, access to deep liquidity in both major and emerging markets, and streamlined account services featuring flexible credit, efficient onboarding, and seamless cross-border payments. Recognized as a top-ranked FX forecaster, Monex also provides a robust suite of research products.

The following case study illustrates how ����vlog���Bվ can help clients save money by taking advantage of the FX market.

Scenario

A US-based Private Equity Firm commits to a cross-border investment in Germany that will close in 2 months. With this acquisition, the firm submits a 15-day capital call notice to their Limited Partners, of which 80% are US-based, and 20% is denominated in a Canadian-based currency share class.

FX Exposure

In this scenario, the fund will have exposure to the Euro to acquire the investment and the Canadian dollar through a capital infusion denominated in local currency from their Canadian-based LP.

Solution 1: Using Forward Contracts

To minimize currency exposure, the fund puts on the following forward hedges for a EUR€200M investment and a CAD$40M capital call.

Hedge details (Spot ref EUR/USD@1.0826, USD/CAD Spot ref @1.4293):

• Buy EUR €200M / sell USD $216.9M at contract rate 1.0845 for 60-day maturity.
• Buy USD $40M / sell CAD $57.084M at contract rate 1.4279 for 15-day maturity.

EUR/USD Outcome:

The euro appreciated by 2.5% in the 60-day time frame between bid acceptance from 1.0826 to 1.1096. Hence, the difference in USD notional for an equivalent €200M Euros moves from USD$216.52M to $USD221.92M. By placing the forward hedge over 2 months, the forward rate of 1.0845 (USD notional of $216.9M), the fund reduces the need for an additional liquidity injection of $5.02M.

The euro depreciated by 2.5% from 1.0826 to 1.0555. The USD notional for €200M moves from USD $216.52M to USD $211.1M. Here, less dollars will be needed to purchase the asset. The fund would be left with USD $5.42M of undeployed capital, creating a potential IRR underperformance.

Source: Bloomberg (7/24 – 3/25) indicating 4-8% currency movements in various 60-day windows

USD/CAD Outcome:

The CAD appreciated by 1.8% to 1.4041 within the 15-day time period. The initial amount of CAD was hedged at a forward rate of 1.4279 to CAD $57.084M, but if the fund had left this capital to the market, this amount would have equaled CAD $56.164M. Hence, the fund would be left with CAD $0.92M if they hadn’t hedged. This creates the problem of undeployed capital, reducing IRR and/ or the issue of returning funds to LP’s, often creating operational burdens and additional costs.

The CAD depreciated by 1.8% to 1.4550. When converted to dollars, the initial CAD $57.084M is now worth USD $39.233M. Without hedging, the fund would have been short USD $0.767M and would require an additional capital call or access to a bank facility to fund the shortfall.

Source: Bloomberg (8/24-3/25) indicating 1.5-2.5% volatility in various 15-day windows

Solution 2: Using Options

Vanilla Option:

Buy a EUR Call/USD Put strike 1.0862 (“At the Money Forward”) with a 2-month expiry. The cost of the option is 1.3000% of the notional amount.

The fund has 100% protection above strike up to the cost of the premium. On the other hand, if the EUR depreciates, the fund has access to spot and can purchase full notional at a more advantageous rate.

At or above: 1.0862 “strike rate” fund executes full notional €200M at 1.0862 “Strike rate” more favorable than the market at expiry.

Below: 1.0862 “strike rate,” option expires worthless, and the fund can execute in the spot market at more favorable rates.

Collar Option:

Buy a EUR Call/USD put strike 1.0895 and sell a EUR Put/USD Call strike 1.0640 with a 2-month expiry. Combined strategy costs .6500% of the notional amount.

The fund has full protection at the higher strike rate with upside participation in the market to the lower strike rate. Upside potential is capped by selling a EUR put, with a reduced premium compared to the vanilla option.

Above 1.0895, the Fund will execute at a “higher strike rate” full notional €200M at a hedged rate better than the spot market.

In between 1.0895 and 1.0640, the option expires worthless. The fund has access to the market at a more favorable spot rate than the hedged rate.

At or below 1.0640, the Fund is required to execute at 1.0640, a better rate than the original hedge but worse than the market.

For informational purposes, the same strategies can be replicated for Canadian exposure using shorter-dated expiries.

“Even though FX is a small part of my business, it has a big impact on our bottom line. Its comforting to know ����vlog���Bվ is always keeping up with the (FX) market for me.”

DOWNLOAD THE CASE STUDY