Less than a month ago, mathematician Christopher McKinlay made waves when he unveiled his quantitative methodology for hacking an online matchmaking website called OkCupid to find his soul mate. Thoroughly discontented with the low yield of his online dating profile – a paltry six first dates in nine months – McKinlay decided to make a change. Instead of continuing to look for love just like any other user of the site would, he created a targeted algorithm to bring mathematical rigor to Cupid’s search mechanism.
First, he created twelve fake accounts, enabling him to gather more than six million data points from 20,000 women around the country. From this mountain of information, McKinlay used a Bell Labs algorithm to create seven statistical attribute clusters based on questions and answers, then figured out which two attribute clusters (indie artists and professional creatives) sounded most intriguing to him. After discovering the 500 questions that were most important to these profile clusters, he answered honestly but let the algorithm decide how much weight to assign to the answers.
The results were immediate. Where previously McKinlay had only seen 100 women above the 90% compatibility threshold, he now had more than 10,000 candidates above that number in Los Angeles alone; there were scores of first dates to schedule! One of those led him to a sculpture garden stroll and sushi dinner with Christine Tien Wang, a prison abolition activist, and before too much time passed, he was asking her hand in marriage. The two might have eventually met in the natural course of using the online service, but they probably connected far sooner thanks to optimizing Cupid.
Here at Chatham we like a good love story, especially around Valentine’s Day, but it’s all the sweeter when it’s really a risk management parable dressed up as a romance. Much like online dating without optimization can be a daunting and potentially impossibly complex task, so too is trying to quantify and manage the sophisticated exposure profile of a multinational corporation! Thankfully, McKinlay’s tips from his e-book on the subject point the way:
Ask and answer the right questions: OkCupid has thousands of questions to choose from, and it’s critical to pick the right subset to increase visibility with potential soul mates. Optimal hedging requires the same kind of commitment to asking and answering the right questions: Is my firm most concerned about managing margin risk on my income statement, or re-measurement risk on my balance sheet? Do we primarily focus on earnings in the consolidated entity, or is our risk management approach designed to satisfy local entity stakeholders? Will we set our budget rates based on actionable hedges, or some other target rates?
Find the proper weightings: OkCupid allows users to weight each answered question on a scale from mandatory through important to irrelevant, in order to refine matches further. Companies with currency exposures across the world have to do the same thing when deciding which ones need to be hedged. A cross-correlated analysis of exposures will clearly demonstrate which currency pair hedges are “mandatory,” or most impactful to operating income or cash flow variability, versus which ones are “important” or even “irrelevant.” Surprisingly, sometimes the currency pairs that would seem to require “mandatory” hedges from an intuitive perspective are actually “irrelevant” to reducing risk to operating income. In fact, the wrong weightings for currency hedges can actually increase risk to consolidated income.
Study competitors: McKinlay recommends creating a bogus OkCupid profile to investigate the profiles of top matches against whom you are being compared. Similarly for treasury professionals, it can be highly instructive to commission a peer study of comparable companies to see how they approach risk management, including fixed/floating mix, hedging instruments used, duration of hedges, etc. It certainly isn’t always bad to be a sector outlier, but understanding how comparable companies hedge almost always leads to beneficial insights on a company’s own approach to risk mitigation.
Engage actively: The OkCupid methodology promotes users based on the frequency with which they log onto the site, rewarding the most frequent users with the desirable “replies often” tag. In the same way, treasury risk management requires active engagement with emerging trends to be practiced effectively. For instance, the rapidly changing regulatory framework for derivatives requires considerable new expertise to ensure compliance with thousands of pages of law and rules. Without close scrutiny of derivatives regulations, including their sweeping ramifications and approaching deadlines, firms risk failing to comply with binding legal requirements.
Rest assured that Chatham has no plans to enter the online matchmaking market. But we firmly believe that there’s no better time than Valentine’s Day to fall in love with your risk management program! So don’t hesitate to give us a call and say “OkChatham” for all your hedging advisory, complex analysis, execution, accounting, or regulatory compliance needs.
Give us a call at 610.925.3120 or email us