Understanding Passive Currency Overlay

Understanding Passive Currency Overlay

The world of Foreign Exchange continues to evolve and expand rapidly, at least in terms of global daily average turnover[1]. This evolution is fundamentally due to:

  • The structure of the market: continued consolidation among the market players.

  • The composition of the market participants: currency overlay managers and traditional asset managers are joined by hedge funds, high-frequency traders and retail aggregators.

  • The new technologies: new electronic platforms and networks are used as well as new services and technologies such as STP and CLS which have added efficiency to the end-to-end trade flow while limiting the risks.

This is happening in the context of a recent financial crisis (2008) where changes and uncertainty have brought a mixed of good and bad news to investors including the opportunity to have a fresh look at the currency risk management policy: whereas some may opt for a more conservative approach, other investors may try to capture the newly emerged opportunities.

This document might be the very first step towards the challenging process of setting up a sensible currency risk management policy.

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