HEDGE21 in figures

How HEDGE21 digital assistant deals with 
EURUSD from November 2015 until January 2018:

A real-world example.

The facts of the case: Fashion made in Asia, sold in EU

A German fashion company sells fashion lines across Europe for EUR-denominated prices. Manufacturing happens in AsiaPac and is paid in USD according to the following schedule:

  • 24 months before closing a fashion line project (e.g. winter collection 2017): Fashion line is being planned.
  • 18 months before close: Collection sold in advance to wholesalers, and production orders are being placed with AsiaPac manufacturers.
  • 6 months before close: Collection's end of season, and fashion line is sold out.
  • Month 0, close of project: AsiaPac invoices are being paid by German fashion company.

R U L E 1

Planned budget rate

On November 24, 2015 the fashion company budgets an exchange rate of 1.1200 EURUSD. Such rate, they believe, would be an acceptable exchange rate per 1 million Euro, equalling then 1,2 million US-Dollar.

R U L E 2

Stop loss rate

On November 24, 2015 the fashion company also contemplates their worst case. The CFO sets a stop loss rate at not far below his budget rate at 1.1000 EURUSD.

R U L E 3

Corporate hedge policy

The company decides to manage exposure strategically rather than opportunistically. While conceptualizing a relaxed atmosphere, they pre-determine a course of action with acceptable risk parameters.

In 26 calendar months,

EURUSD increased c. 16% in value.

Nice market move in the company's favour.

Market rates developed in investor's favour.

Other than feared in 2015, until January 2018 the Euro appreciated against the US-Dollar. At the forward market (red line), US buyers on 24.11.2015 paid 1.1086 US-Dollar for the Euro, compared to 1.2382 US-Dollar on 31.01.2018. Spot rates (green line) were lower and reached from 1.0688 to 1.2381 US-Dollar. At the end of the hedging period, the company would have exchanged 1,000,000 € into 1,238,200 US-$ - if they had not hedged. Pure speculation, though. 

But at a rate of 1 .1000 EUR, the stop loss hits.

Already on day 11 of the whole hedging period.

Revenue potential per 1M. EUR given away:
129,600 US-Dollar, or 11.69%.

Too early in time, the stop loss hit hard.

At the beginning of any hedging period, nobody can project the market, hence it is very advisable to define a stop loss rate.
However, backward looking from maturity date on 31.01.2018, the company's stop loss was set according to a very low risk tolerance, and the company’s exposure was stopped out early in the hedging period. A gain potential of max. 11.69% (129,600 US-Dollar/1M. EUR), was given away.

Getting it right:
HEDGE21 can do optimally.

A hedging policy defines degrees of freedom.

A hedging policy is a CFO's plan of action. In the given case and during the early 8 months of the 26-months hedging period, the investor's hedging policy allows any hedge size between a zero hedge and a full 100% hedge. From c. August 2016 on, the risk mitigation plan increases stepwise from 25% to 75% hedge.

Within the given boundaries, either the human treasurer or a HEDGE21 digital assistant are allowed to act with freedom.

HEDGE21 "Dynamic" exploits the policy.

There are four flavors of HEDGE21 digital assistants available - all combinations of dynamic, passive, performance-oriented and risk-averse properties. All of them compute an optimal hedge ratio once every day.

Left-hand figure: A dynamic HEDGE21 digital assistant suggests to scale in and out a hedge almost every day. It's a busy assistant; its passive peer can only increase, but not decrease a hedge.

Effect one: Much lower price volatility.

HEDGE21 decreased the exposure's price volatility and the CFO's risk drastically. Right-hand figure: Without any hedge, the CFO was exposed to an EURUSD rate fluctuating between 1,310 pips up and -870 pips down. HEDGE21 decreased fluctuation to a maximum of 900 pips up and -120 pips down. Spoken in US-Dollars: HEDGE21 reduced the downside risk from a maximum of -87,000 to -12,000 US-Dollar. The probability that a no hedge outperfomed HEDGE21 was 2.77%.

Effect two: Outperformed benchmarks.

How does HEDGE21 benchmark against other strategies?

Against the CFO's budget rate: +1080 pips
Against the CFO's hedging policy: +541 pips
Against a full 100% hedge: +994 pips
Against a 50% hedge: +768 pips
Against a 0% hedge: -302 pips

HEDGE21 outperforms all benchmark strategies, except no hedge with a probability of 2.77% of occurrence.

Still thinking?

Contact us for a free trial and learn how effective it is to use HEDGE21.



An Alcazar Capital Brand

North Tower, 2204

Emirates Financial Towers, DIFC

PO BOX 506672, Dubai

United Arab Emirates

Email: hello@hedge21.com


Legal disclaimer. This website and its associated documents (the “Website”) have been prepared by HEDGE21 and/or its affiliates ("HEDGE21") solely for information purposes with regard to their currency exposure related data product (the “Data Product”) and is being furnished through HEDGE21 solely for information purposes to assist the recipient in deciding whether to proceed with further analysis of the Data Product contemplated herein.

This Website is not a prospectus and does not constitute an offer or invitation or the solicitation of an offer for the sale or purchase of any assets or shares and shall not form the basis of, or constitute, any contract or binding offer. The information set out at this Website is preliminary and should not be relied upon for any purpose.

Neither the receipt of this Website by any person, nor any information contained at this Website constitutes, or shall be relied upon as constituting, the giving of investment advice by HEDGE21 to any such person. Recipients should conduct their own review and analysis of the Data Product, its vendor, prospects, results of operations and financial condition. Past performance is not a guarantee of future results. Recipients should consider any procurement of the Data Product contemplated at this Website and its associated documents as a supplement to an overall investment program. Read more

© 2019 HEDGE21