Chathamite

This New Year’s, did you promise yourself you’d be in Ironman-distance triathlon shape by summer? Swear that you wouldn’t touch another chocolate bar until your BMI dropped to the target range? If you’re already finding those ambitious New Year’s resolution targets for diet and exercise too tough to maintain – along with 88% of us, according to British psychologist Richard Wiseman – we’ve got great news! It turns out that too much exercise, and too much dieting, may be detrimental rather than beneficial.

In November, a pair of American cardiologists published an editorial in the British journal Heart that counseled strongly against extreme exercise, whether in distance or in time. It turns out that cardiac abnormalities like arterial calcification found in extreme athletes can rival those found in very obese individuals! The cardiologists went so far as to prognosticate a potential earlier demise for the super-athletes, stating: “A routine of moderate physical activity will add life to your years as well as years to your life. In contrast, running too far, too fast, and for too many years may speed one’s progress towards the finishing line of life.” They counseled targeting a maximum 30-50 minutes per day of exercise, at speeds not to exceed 8-minute-miles, and no more than 20 total miles per week. Being told by two cardiologists not to run too far or too fast is music to our ears!

Then earlier this month, The Journal of the American Medical Association published a BMI meta-analysis of ninety-seven separate studies covering nearly three million people all over the world. The central finding was that while extremely obese individuals had the highest mortality rate during the study period, overweight individuals were 6% less likely to die than target-weight individuals! This effect remarkably held irrespective of region of the world, smoking status, and other control factors. And it isn’t just one study: another look at individuals who contracted diabetes showed that the overweight contingent lived twice as long after diagnosis as did the target-weight cohort.

Of course, scientists are falling over themselves to urge caution in interpreting the findings. BMI isn’t the best health metric, since muscle mass also raises the index; also, BMI doesn’t differentiate between fat in the belly (which generally accompanies negative health outcomes) and padding elsewhere in the body (which can possess a protective effect in moderation). But the fact remains that individuals who moderately exceed the “ideal” BMI experience greater longevity than those who are right on target. So now in addition to running shorter distances at a slower pace, we won’t be feeling the least bit guilty about indulging in that slice of triple chocolate cake for dessert. Thank you, science!

Of course, all of the recent revelations from medical research got us thinking about the world of risk management. Like diet or exercise, hedging has the potential to be pushed to extremes that produce negative financial health outcomes. If a real estate company acquires a single hotel and takes out a 5-year floating-rate financing for $50 million, it’s clear that the size of the interest rate swap or cap on the deal should not exceed the amount of the financing. However, when the entire consolidated balance sheet of a corporate with exposures in twenty-five currencies needs to be hedged, the risk of over-hedging becomes much more significant. So what can companies do to avoid over-hedging?

Exposure Identification: First, any corporate hedging program must include the requirement to measure currency exposures aggregated across the entire corporate structure. This facilitates the ability to net exposures (where appropriate) among the worldwide entities, giving the clearest picture of key drivers to enterprise risk.

Correct Hedging: Having correctly identified exposures on an aggregated basis, companies then need to specify their target amount of risk reduction and how to accomplish it. Determining the correct currencies and amounts to hedge via cross-correlated currency analysis is critical; without this, companies run the risk of hedging the currencies that don’t afford the greatest risk reduction, or even increasing currency risk on a consolidated basis. Also, even if hedging the currencies chosen actually does reduce risk, a company’s chosen hedges may do so in a sub-optimal fashion, requiring more trades (and hence higher trading cost) than an optimized hedging strategy.

Accurate Measurement: Once true netted exposures are identified across the worldwide organization, and optimal hedges are determined via cross-correlated analysis and implemented, accurate measurement of risk reduction becomes centrally important. If measures do not capture the fully consolidated exposure picture, but only exposures from a specific currency or region, there will be no way to measure how much risk has been globally reduced via hedging in order to gauge the ongoing effectiveness of the program. Continuing to measure global exposures net of hedges allows assessment of program efficacy and guides future adjustments based on updated exposure information.

While the right hedges effectively reduce currency exposure and earnings volatility on a consolidated basis, the wrong hedges will actually increase volatility. If you have any questions about how to identify your currency exposures and hedge them optimally, please don’t hesitate to give us a call. Or meet us for dinner and a guilt-free dessert!