B9AF005 Treasury Risk Management Report: FOREX and Hedging Strategies

This report provides an in-depth analysis of treasury risk management, focusing on the current state of the Foreign Exchange (FOREX) market, particularly in the context of the Coronavirus pandemic. It explores various derivative instruments and offers strategic recommendations to aid investors in navigating market volatility and mitigating risks. The report discusses appropriate hedging strategies to minimize market risk, including Modern Portfolio Theory, options, and the Volatility Index (VIX), while also providing recommendations for improving overall hedging strategies within hedge funds. Additionally, the report addresses event risks and provides a framework for effective risk management, including planning, identification, qualification, quantification, and monitoring. The analysis highlights the importance of diversification, understanding market dynamics, and carefully selecting hedging instruments to protect investments from adverse price movements. The report also emphasizes the need for continuous research and a strong understanding of market predictions to make informed investment decisions.

Running head: TREASURY RISK MANAGEMENT
TREASURY RISK MANAGEMENT
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Executive Summary
In this report the current situation of foreign exchange market is stated due to the effect of
Coronavirus globally. Different types of derivatives are discussed and certain recommendations
are provided to help the investors. Volatility of the market and risk management for portfolio is
also discussed in this report.

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Table of Contents
1.1 Introduction................................................................................................................................3
1.2 Discussion..................................................................................................................................3
1.2.1 Current situation of FOREX...............................................................................................3
1.2.2 Appropriate strategies of Hedging to minimize marker risk..............................................5
1.2.3 Strategically recommendations for volatility, hedging and event risks..............................7
1.2.4 Recommendations for improving the hedge fund’s overall hedging strategy....................8
1.3 Conclusion.................................................................................................................................9

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1.1 Introduction
An investor must have a proper knowledge regarding the market and different types of
assets so that they know the positive as well as the negative consequences of their investment.
Market is very much prone to risk and hence it is suggested that investors should take proper
action to avoid as much as risk they can. In this report the current situation of FOREX is
discussed due to the pandemic effect of CORONAVIRUS and it is noted that the economic
condition of every country has shown a downfall in their trend as global trading is stopped for
meanwhile which has impacted the business to a huge extent. Different types of derivatives,
options, volatility of the market and event risk is discussed in this report. If the market trend is
not carefully followed and if the assets are not carefully secured then it is guaranteed that the
investor will face lose and it will negatively impact the economy of that nation as well. Financial
planners have a thorough knowledge of every asset and they can predict the future market along
with the adverse effect from different types of risks. They can professionally suggest the
investors with effective risk management portfolio so that the investors can get a lot of benefit by
just providing a little more amount for securing their asset from risks.
1.2 Discussion
1.2.1 Current situation of FOREX
Current situation in Foreign Exchange for every currency is very depressing because the
value of each and every currency if falling down due to the pandemic attack by Coronavirus.
USD is mainly considered by most of the countries as a base to measure their own currency
value according to $1. Currently many news are coming regarding the poor situation of foreign
exchange market and affected by the lockdown situation in many countries all over the world

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due to Coronavirus effect. Currently a news came regarding the EUR/USD where it was
specified that open-ended asset purchase program is improving the altitude for EUR/USD
(Abodunrin, Oloye and Adesola 2020).
Source: Dailyfx.com, 2020
However, it is noted that Germany and Eurozone preliminary Manufacturing PMIs may
get disappointed. Current news regarding GBP/USD states that this currency 1.1600 ahead of
UK/US when managers index is purchased. GBP/USD also benefitted a lot from the weakness in
US dollar. Preliminary PMI data is posted which will provide information regarding the effect of
Coronavirus on different key activities (Ayittey et al. 2020). From the current date list of foreign
exchange rate of different countries are shown where form it is clear that the value of GBP has
increased per dollar that is by 76% and value of EUR has also increased by 54% per dollar.

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Source: Dailyfx.com, 2020
According to a news article there will be great downfall in the foreign exchange market
after the pandemic disaster ends. Due to the lockdown of economy and elimination of global
trading, the foreign exchange market showing a negative result overall. Natural disaster can
affect the foreign exchange rate to a high extent. Every nation’s currency reacts to the change.
The additional cost the handle the situation in any country will further decrease the economic
condition of the country and their currency value will fall further more. Economic disaster will
also lower consumer spending and consumer confidence which effects the forex market and
currently his situation is happening in Forex. Currently the US dollar was high because investors
were waiting for the time when there will be a US fiscal stimulus which will get impacted by the
business shutdown situation (Luo and Tsang 2020). At first the dollar rate was showing a
decreasing trend however after the US government announced about the stimulus, the investment
again increased sharply. The US currency have gained a turnaround in US dollar because of
hedge funds to net short form overall long bet as per the latest data collected. In a current news
regarding the Pound Surge against Euro and dollar it is stated that due to Brexit deal the sterling
increased by 21% against dollar and 1.8% against Euro. The figures shown changes frequently
and can change due to the current market situation of business shutdown globally.
1.2.2 Appropriate strategies of Hedging to minimize marker risk
There are many different types of strategies depending upon the portfolio of assets which
needs to be get hedged. However, only three of the strategies are the most popular ones and they
are listed below:
 Modern portfolio theory (MPT) – the main concept here is to diversify so that there
will be group of assets which will reduce volatility. This theory makes use of some

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statistical measures which will be helpful in determining efficient frontier for a specific
amount of return on a given amount of risk. Optimal portfolio can be created with the
help of correlation between different types of assets as well as finding out the volatility of
the assets. Financial institutes are the main users of this theory in their risk management.
Efficient frontier is considered to be a curved line which depicts a relationship between
risk and return. Different investors will have different level and types of risk tolerance,
depending on this act Modern Portfolio Theory can design and advice different investors
with choosing portfolio according to their preferences (Hasanat et al. 2020).
 Options – this is considered as another type of powerful tool. Investors who have are
concerned about risk of downside move of their individual stock often buys put option to
hedge their individual stock with some reasonable liquidity. When the price of the
underlying asset moves down at that time the puts gain some value. However, the only
thing which the investors don’t like is buying the put options with the premium amount.
Options can lose their value when it expiration date arrives (Gormsen and Koijen 2020).
Vertical put spreads are used to reduce the amount of premium but it also reduces the
amount of protection. Index options are mainly used by investors who hedges a lot of
amount and those who have diversified their portfolio of stocks. Investors usually uses
put options to hedge their investment on indexes to reduce risk for them. Bear put spreads
are known as a strategy to reduce the risk. It is still very costly for the investors, but it
provides maximum security to hedgers.
 Volatility Index Indicator (VIX) - this indicator is used to basically measure the implied
volatility at money calls & puts on S&P 500 index. This indicator is also known as fear
gauge because the VIX increases due to when the volatility also increases. Level below

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20 is considered to be in low volatility a level at 30 is considered to be high volatility.
VIX is tracked by the exchange traded funds (EFTs) and most of the investors uses EFT
share or options for volatility specific hedge. However, this cannot reduce or eliminate
each and every type of risks.
1.2.3 Strategically recommendations for volatility, hedging and event risks
Hedging strategies starts with using derivatives. These contracts derives their value from
underlying asset like stock. Most common derivative is the option because it provides right to
sell or buy stocks at specified prices within a span of time. Whenever any investor buys stock,
they tend to think that the price will go up but still want to protect their stocks against any type of
losses if price falls. Here the investor will set put option to hedge the risk including some extra
amount while buying the asset. Here the investor will buy the right to sell stock at the fixed price
but if the price falls then the investor can exercise their right and make money form it minus the
extra fee. Diversification can also be used as a strategy for hedging the assets or stocks bought by
the investor.
For the volatility market there are two types of strategies. First one is Tail-risk hedging
where investor buys derivative contracts which are expected to perform well in the situation of
market stress. The value of these derivatives can be equal to different market indexes all over the
world. This hedging function is also similar to traditional investment mandate. Another strategy
is known as Downside protection overlays which refers to those strategies where risk mitigation
steps are provided to reduce the downfall risk of some specific equity exposure. This system of
hedging is more explicit than the system of tail-risk because here the underlying investment and
hedging instrument both are based upon the similar benchmark exposure. Equity downside
protection can have a much bigger component because here the hedging return which comes

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from the actual market movements of underlying exposure (Gong et al. 2020). This system
provides protection from bad outcomes but it might deliver less profit compared to tail-risk.
The strategy for event risk can be provided from proper risk management process. There
are some steps which can be taken and the initial steps starts from plan risk management where
project risk infrastructure is developed. The next step is to identify the risk and then qualify the
risk after proper evaluation. Quantify of risks is the next step where evaluation is done according
to their impact and numeric probability. The next step is to plan the risk response and then
monitor & control the risk along with some steps of management plan into action. Following
these steps will help the investor to strategically find out the emergence of the risk, find out its
impacts and then plan some smart and innovative strategies to minimize or eliminate risking the
asset. This will help the investors to remain tension free and plan their investment properly
(Fornaro and Wolf 2020).
1.2.4 Recommendations for improving the hedge fund’s overall hedging strategy
Hedging process is applied by the investors to minimize the risk on investments. Risk is
inevitable and hence it cannot be avoided but can be reduced using some relevant hedging
strategies. A long stock position can be simply hedged purchasing some put options or
developing a collar. But risk over portfolio needs more huge steps to be taken because it involves
multiple assets from different classes and positions. Liquidating a portion of the equity holding
which can minimize the impact of stock market decline over the investor. However, many
investors does not like to move comfortably in and out either because of the tax consequence or
due to time for re-entry. However, hedging is not for everyone. Investors who wants to use this
should be well-aware with the terms like trade-offs an options (Beck 2020). A lot of investors
have a long-term horizon and they always try to avoid small-term market fluctuations. It is

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important to carefully select the type of hedge for specific portfolio. Cost and effectiveness are
the two indicators which helps the investors to select the type of hedge for their investment.
Hedge is stated to be more effective when the value of asset is mostly secured when it gets
exposed to the adverse price movements.
Another most important thing to decide is the amount of asset which will be hedged to
get highly secured from the market fluctuations and future adverse situations (Fetzer et al. 2020).
A lot of research should be done and a vast knowledge regarding the market and future
prediction is needed before any plan is adopted. Proper allocation of the asset and proper
planning should be done. Here the investors can also consult some financial planner who have
professional knowledge regarding the market and they would advise the most relevant strategy
for the investor which can be adopted to reduce the risk for the asset as much as possible. If the
investor does not have enough knowledge regarding the adverse situations and current market
situations then it is advised to those investors not to take risk prone portfolio or consult financial
planners for risk management purpose who will perfectly guide the investors accordingly. A lot
of information is provided and the investor just needs to gather relevant information and predict
the future market situation and the amount of adverse situation very carefully so that the risk can
be strategically managed (Chohan 2020). More and more research clears out the complexity of
the market which increases the probability that the investor will choose relevant portfolio risk
manager in a specific market which will benefit them more. Securing the portfolio can cost a
little more however, the impact and benefit of it is huge.
1.3 Conclusion
Portfolio risk management is very important for individual investor as well as for the
economy too. From the above discussion and analysis it can be stated that investors while

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investing any amount is any asset should have in-depth knowledge regarding the market, the risk
associated with different types of assets, derivatives to secure the assets from any type of adverse
situations and a lot of things. If any investor loses their money over any asset and does not make
profit then the financial economy also gets impacted from that lose. Hence, it is important for the
investor to secure their assets. Different types of strategies related to the volatility of the market,
hedging and event risk is discussed thoroughly in this report. Different types of hedges are also
discussed which gives an idea to the investors to properly hedge their asset using some kind of
derivative or options. It is recommended to the investors to take professional help from financial
planners to know regarding the current market situation and predict about the future market
situation including different kinds of adverse risks which may arise. Even with in-depth
knowledge over the hedging concept, investor misses out some point to notice which impacts
them very adversely and hence to stay in the safer side of the market risk, investors should
consult the financial planners once before investing on any asset.

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impacts of Wuhan 2019‐nCoV on China and the world. Journal of Medical Virology.
Beck, T., 2020. 6 Finance in the times of coronavirus. Economics in the Time of COVID-19,
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Chohan, U.W., 2020. A Post-Coronavirus World: 7 Points of Discussion for a New Political
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Dailyfx.com, 2020. EUR/USD: Euro - Dollar Rate, Chart, Forecast & Analysis. [online]
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