EAKO Capital

🔍 Why Your FX Hedging Costs Are Rising: Understanding CVA If your company uses FX forwards for long-term currency hedging, you've likely noticed increased costs. Here's why, and what you can do about it 👇 1️⃣ The CVA Premium Think of CVA (Credit Valuation Adjustment) as an insurance premium. Banks charge it to protect against potential defaults over your hedge's lifetime. Longer contracts = Higher premiums. 2️⃣ Complex Pricing Models Gone are the days of simple forward calculations. Modern pricing includes: - Expected exposure models - Default probability assessments - Recovery rate calculations #RiskManagement 3️⃣ Credit Rating Impact 💡 Pro Tip: Your company's credit rating directly affects hedging costs - Better rating = Lower CVA charges - Higher CDS spreads = More expensive hedges #Treasury 4️⃣ The Collateral Question Banks might request collateral to reduce CVA charges. This means: - Lower hedging costs 📉 - BUT more complex liquidity management 📈 #WorkingCapital 5️⃣ Accounting Challenges Watch out! CVA can affect your hedge accounting: - May introduce P&L volatility - Could impact effectiveness testing - Requires careful documentation #Accounting #Finance 6️⃣ Smart Risk Management Best practices for modern FX hedging: ✅ Diversify bank relationships ✅ Monitor credit ratings actively ✅ Consider shorter tenor strategies ✅ Optimize collateral arrangements 🎯 Key Takeaway: CVA has transformed FX hedging from a simple pricing exercise into a complex risk management challenge. Success requires a strategic approach integrating treasury, risk, and accounting considerations. 💡 What's your experience with CVA pricing? Share your thoughts below! #RiskManagement #Treasury #CorporateFinance #FXTrading #Finance #Banking #Derivatives #Hedging #FX

𝗖𝗿𝗼𝘀𝘀-𝗖𝘂𝗿𝗿𝗲𝗻𝗰𝘆 𝗦𝘄𝗮𝗽𝘀 and their alternatives. Some thoughts, elevated by a little AI rewrite to inject some humour... Hold onto your currency hats, folks! It's time for a wild ride through the world of 𝗰𝗿𝗼𝘀𝘀-𝗰𝘂𝗿𝗿𝗲𝗻𝗰𝘆 𝘀𝘄𝗮𝗽𝘀 and their quirky alternatives! Picture this: European companies and asset managers are diving headfirst into the pool of USD loans from credit funds and family offices like it's the hottest summer trend. But wait! There's a plot twist – these eager beavers are now facing a currency conundrum that's more tangled than a bowl of spaghetti! Enter the superhero of the financial world: 𝗖𝗿𝗼𝘀𝘀-𝗖𝘂𝗿𝗿𝗲𝗻𝗰𝘆 𝗦𝘄𝗮𝗽𝘀! These magnificent beasts swoop in to save the day, managing currency risk like a boss and unlocking the treasure chest of lower EUR interest rates. But hold your horses! Not everyone gets to ride this magical unicorn. Borrowers with credit profiles shakier than a leaf in a hurricane might find themselves out in the cold unless they're ready to play the collateral game. But fear not, dear financial adventurers! We've got some alternative tricks up our sleeves: The "𝗥𝗼𝗹𝗹𝗶𝗻𝗴 𝗙𝗫 𝗦𝘄𝗮𝗽 𝗣𝗿𝗼𝗴𝗿𝗮𝗺𝗺𝗲": It's like a never-ending rollercoaster of currency hedging! Buckle up for a wild ride of mitigating risk and slashing funding costs. Just remember to keep some spare change in your pocket for those unexpected twists and turns! The "𝗖𝗮𝗽𝗽𝗲𝗱-𝗟𝗼𝘀𝘀 𝗙𝗼𝗿𝘄𝗮𝗿𝗱": This little gem is the Swiss Army knife - especially for EUR-denominated borrowers. It's got more tricks than a magician's hat, using forward carry benefits to fund an out-of-the-money option. It's like having a financial safety net with a cherry on top – potential upside if rates go bonkers! So, whether you're a currency swap connoisseur or a hedging newbie, there's a flavour for everyone in this financial ice cream parlour. Just remember, in the world of international finance, it's not about the destination – it's about how creatively you can swap, roll, and cap your way to success! Now, who's ready to dive into the wacky world of currency risk management? Let's make those USD loans work harder than a caffeinated squirrel! #FinancialRollercoaster #CurrencySwapSuperheroes #HedgingHijinks

"𝗜𝘁'𝘀 𝗮 𝗵𝗮𝗿𝗱 𝗸𝗻𝗼𝗰𝗸 𝗹𝗶𝗳𝗲" - 𝗝𝗮𝘆 𝗭, 𝟭𝟵𝟵𝟴 I've been thinking about barrier options recently and how knock-ins and knock-outs are used by corporates to either: 1. Target immediate outperformance; and / or 2. Create pathways for future rate improvement. When they work, they really do deliver significant benefits. However, they can often work against the corporate's interest when: a) Knock-outs terminate protection, when needed most; and b) Knock-ins increase liabilities/hedging costs when triggered. I anticipate the recent move above 1.20 in GBPEUR would have seen a number of barriers triggered. When using barriers, corporates (and those structuring or marketing such solutions) should think about what type of barrier to use: • 𝗘𝘂𝗿𝗼𝗽𝗲𝗮𝗻: Monitored at expiry, impacts only the relevant fixing. • 𝗔𝗺𝗲𝗿𝗶𝗰𝗮𝗻: Monitored continuously, impacts all future fixings if triggered. • 𝗪𝗶𝗻𝗱𝗼𝘄𝗲𝗱: Monitored within a defined period, impacts related fixing(s). • 𝗗𝗶𝘀𝗰𝗿𝗲𝘁𝗲: Monitored at expiry, impacts all future fixings if triggered. • 𝗖𝗼𝗻𝗱𝗶𝘁𝗶𝗼𝗻𝗮𝗹: Requires multiple trigger events to take effect. Positioning and monitoring of barriers is crucial. Also, for the canny corporates out there, barriers can be used to reduce risk. For example, whilst working within banking I always considered adding Liability Knock-Outs onto leverage to give the corporate the opportunity to eliminate risk. If done smartly, it doesn't have to cost that much. #fx #fxoptions #knockin #knockout #hedging #fxriskmanagement