Managing Foreign Currency Risk

Chris Loong Head of Australian Institutions Foreign Exchange Sales chris.loong@cba.com.au

Managing Foreign Currency Risk

• Overview of Risks and Opportunities

• Case Study: The Global Financial Crisis

INVESTMENTS RISK

ASSET ALLOCATION

PORTFOLIO CONSTRUCTION

IMPLEMENTATION

INVESTMENTS RISK

• Foreign Assets

• Hedging Policy

• Active / Passive

• External / Internal

• Total Portfolio / Asset Class

• Benchmarks

ASSET ALLOCATION

PORTFOLIO CONSTRUCTION

IMPLEMENTATION

Market Risk

INVESTMENTS RISK

•Foreign Assets

•Hedging Policy

•Active / Passive

•External / Internal

•Total Portfolio / Asset Class

•Benchmarks

ASSET ALLOCATION

• Asset Class Management

• Active / Passive

• External / Internal PORTFOLIO

CONSTRUCTION

IMPLEMENTATION

Market Risk

Market Risk

Manager Risk

Aggregation Risk

INVESTMENTS RISK

•Foreign Assets

•Hedging Policy

•Active / Passive

•External / Internal

•Total Portfolio / Asset Class

•Benchmarks

ASSET ALLOCATION

•Asset Class Management

•Active / Passive

•External / Internal PORTFOLIO

CONSTRUCTION

• Internal / External

• Benchmarks

• Rebalancing

• Derivatives

• Counterparties

• Emerging Markets

• Execution

IMPLEMENTATION

Market Risk

Market Risk

Manager Risk

Aggregation Risk

Operational Risk

Credit Risk

Compliance Risk

Case Study: The GFC

Case Study: The GFC

• Portfolio Exposures

• Rebalancing

• Manager Risk

• Liquidity

• Emerging Markets

• Transactions Costs

Market Risk

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

Jul-2

001

Jul-2

002

Jul-2

003

Jul-2

004

Jul-2

005

Jul-2

006

Jul-2

007

Jul-2

008

Jul-2

009

Jul-2

010

Jul-2

011

1m FEC Return

1m ATM Call Return

AUD/USD 1 month FEC vs 1m ATM Call Returns

0%

5%

10%

15%

20%

25%

-13%

-10%

-8%

-5%

-3%

0%

3%

5%

8%

10

%

13

%

Pro

bab

ilit

y

Return

Histogram of Historical Returns since Jan 2000

1m ATM Call Days Probability Average

Positive Returns 1333 47.2% 2.4%

Negative Returns 1493 52.8% -1.3%

1m FEC Days Probability Average

Positive Returns 1754 62% 3.1%

Negative Returns 1072 38% -3.1%

AUD/USD 1 month FEC vs 1m ATM Call Returns

Case Study: The GFC

• Portfolio Exposures

• Portfolio Exposures

• Rebalancing

• Manager Risk

• Liquidity

• Emerging Markets

• Transactions Costs

Market Risk

•Counterparty Risk

• Counterparty Risk

Credit Risk

Case Study: The GFC •Portfolio Exposures

•Rebalancing

•Manager Risk

•Liquidity

•Emerging Markets

•Transactions Costs

Market Risk

•Counterparty Risk

Credit Risk

• Compliance

• Data

• Aggregation

Operational Risk

Conclusions

• What are your Exposures?

• Active or Passive management?

• Internal or External?

• Managing Non-Market risks?

chris.loong@cba.com.au