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?

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