FX hedging for Capital Economics
Hedging and Capital Markets
Private Equity | London
A case study of how Chatham advised Capital Economics to optimally hedge the FX exposure from a multi-currency revenue stream and cost base.
- Capital Economics is a leading provider of macro-economic research and analysis sold to clients on an annual subscription basis.
- The business completed a secondary management buy-out in March 2018.
- Capital Economics was introduced to Chatham by the private equity fund that invested in the business.
- Capital Economics has a GBP cost base with revenue in a variety of foreign currencies.
- A large proportion of the company’s sales are USD, causing an FX exposure.
- Capital Economics did not have much relevant in-house treasury expertise and was looking to engage independent advice.
- Chatham explored FX forwards, options, participating forwards, and collars.
- Settled on FX forwards, as the nature of Capital Economics’ business allows reasonable prediction of their USD cash flows.
- Chatham also proposed use of a rolling layering programme of forwards (see below graph).
- Chatham introduced two counterparties and obtained illustrative pricing.
- The rolling layering strategy is straight forward and very effective, allowing Capital Economics to be 100% hedged in the short term, while maintaining flexibility further on.
- Chatham ensured deals were done at agreed, fair and transparent margins.
- Chatham assisted Capital Economics with counterparty selection, documentation and dry runs.
- Capital Economics’ board was safe in the knowledge that the process was led by an independent and experienced team.
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This material has been created by Chatham Financial Europe, Ltd. and is intended for a non-U.S. audience. Chatham Financial Europe, Ltd. is authorised and regulated by the Financial Conduct Authority of the United Kingdom with reference number 197251.
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An FX forward is a contractual agreement between the client and the bank, or a non-bank provider, to exchange a pair of currencies at a set rate on a future date.
An FX option is a contract that confers on the holder the right but not the obligation to exchange an amount of one currency for another at a pre-agreed rate (strike rate) on or before a pre-agreed date.