Currency hedge in SimCorp Dimension system
💲 Currency overlay plays a crucial role especially if you deal with a wide range of funds in your business operations. After economical crisis many regulations became stricter in terms of data disclosure. That also refers to the Look Through funds’ data. The constantly increasing digitalization influences on the entry point to the capital markets: it becomes easier for the wide range of participants to enter the markets. Consequently, it has an impact on the market volatility, including the currency/FX risk. Together with LDI (interest rate risk hedging), market risk measurement, portfolio performance and index tracking , the currency hedge is one of the most popular services, which the top tier asset managers are looking for.
🧊 Within SimCorp Dimension there are a few possible solutions which could automate the currency hedge process significantly, reducing the operations risk. For example, rebalancing module is dedicated to not only track the index/benchmark but also provides a scenario to automate and execute the currency hedge process accordingly. A new generation of currency hedge module has been developed and integrated into Asset Manager application (i.e. another possible solution), where the asset managers have an opportunity to combine all hedge strategies in a single place (including risk and performance figures). The Asset Manager application support some specific features, especially related to automatic roll-out of FX hedge contracts for the currency risk, what might be handy to use. On the other hand, the Asset Manager solution would require a real user to execute the hedge strategy within the application, whereas the Rebalancing module could potentially execute the full process automatically (i.e. fully STP) and provide the final hedge report. Thus, the users profiles and their expected involvement levels should be taken into account during a choice of optimal solution.
🔍 Another interesting side of it is a frequency of external funds Look Through data. Often, the regulations require such data on a quarterly basis, whereas the currency hedge might be expected by clients on a monthly basis. In such case you would have to analyze and estimate the optimal data import frequency and related costs. The funds (and derivatives) decomposition functionality evolved significantly within Dimension system. Besides different options regarding decomposition depth level and residual distribution, there is even a possibility to use the generic fund decomposition components (e.g. in case you get only the weights per currency for a fund on a monthly basis instead of detailed look through on a quarterly basis). All such options should be used carefully as they might have an impact on fund valuation.
📧 If you have more questions regarding optimal solutions possibilities for currency overlay automation with Dimension system – feel free to contact Unitso team.