Currency management is a vital element of international investment. When an individual or company invests in a foreign asset, in addition to the return (hopefully a gain or, if it goes wrong, a loss!) they will see on the investment itself, they will also see a return on the currency which was used to invest.
Values of currencies are constantly rising and falling. You may have noticed it on the exchange rates boards when you queue up at the Bureau de Change to get your holiday pennies). This is a risky business for the investor! It can have a major impact on the overall return on investment, as there is the risk that a loss in the currency return will seriously eat into actual returns from the asset. In some cases it could even outweigh it!
Let’s get hedging…
Currency management (also known as currency overlay) experts combat this element of risk, referred to in the business as currency exposure. They develop hedging strategies to protect companies who invest internationally against weakening currencies and, where possible, attempt to simultaneously capitalise on strengthening currencies. Hedging is nothing to do with topiary; it’s actually an asset management tactic which aims to balance investment risk.
A bit more on currency management
Currency management teams consist of strategists in a research and strategy department who can use their exceptional mathematical abilities combined with quantitative analysis to calculate risk in different currency investments. They utilise lots of economic and market data to help them calculate the hedge for each currency. The credit team will conduct research into potential investments on behalf of clients; whilst it’s the job of the portfolio managers to liaise with clients, pitch strategy suggestions that have been tailored to their needs, update them on progress and discuss any changes to hedging and network to source potential new clients. They can also advise on Forex trading.
Specialist currency firms and investment banks provide the pickings for currency management roles. It’s a graduate area of recruitment – and a competitive one at that! Candidates with finance-related degrees, top academic profiles and relevant work experience are sought-after in this industry.