A Japanese client faced USD heavy FX risk, slow hedge shifts, expensive hedge floors, and high USD/JPY costs, prompting a need for a different approach.
The Japanese client, holding a large USD-denominated portfolio, used several currency strategies but faced key issues: heavy USD concentration, slow hedge adjustments during yen appreciation, costly hedge floors, and high USD/JPY hedging expenses. These challenges led the client to seek a more responsive, cost-efficient hedging approach capable of adjusting hedge ratios quickly while reducing unnecessary costs.
Key highlights:
- Concentration risk: FX exposure remained heavily biased toward the U.S. dollar.
- Limited responsiveness: Existing dynamic hedging strategies did not increase hedge ratios quickly enough during periods of sharp yen appreciation.
- Inefficient hedge floors: Floor-based strategies required maintaining expensive, relatively high hedge ratios even when market conditions did not warrant them.
- High hedging costs: USD/JPY hedging costs exceeded 5% in the prior year, making persistent partial hedging costly during periods of yen depreciation.