Friday May 20, 2022

The core of currency risk varies according to the investment instrument

As an investment tool, you have chosen a product for which a fixed amount is paid out in advance. In this case, only the koruna’s exchange rate represents the risk in which the installment is fixed.

In order to understand where the risk lies, it is time to know the conditions of the investment instrument. Sometimes it may not be easy for the beginning intermediaries. Therefore, I will try to show on several examples how to think about my risk.

Guaranteed products
Let’s include the instruments that sell the most of our structured products. These are hedge funds and guaranteed certificates and guaranteed structured bonds work in a similar way. The investor offers the certainty of the return of the investment and based on the returns of a certain underlying asset.

From the point of view of currency risk, it is important to know how it is valued. For most instruments, it is customary to write the evaluation in a certain ratio and on the basis of the average data from several monitored days. This results in a certain evaluation, which is written in my instrument.

Therefore, most guaranteed funds bear only one currency risk, and thus the exchange rate of the koruna is less than the currency in which the instrument is due, and in which there is a fatal guarantee of return on investment. If the crown is a hedge fund, then this risk is a waste.

If it is a hedge fund denominated, for example, in the US dollar, then the investor takes the risk associated with the exchange rate of the dollar and crowns. At maturity, the investor will receive a total of $ 5,000, which he invested in the fund, or even more, but their value may be quite different from the value of writing to the fund.

However, in some cases it is evaluated differently. There is no average aid, but it is based on the current value of the underlying asset and the exchange rate of the underlying asset in the reference currency of the instrument (plus the measure in the applicable participant ratio). In such a case, the exchange rate of the koruna to the underlying asset plays an important role.

Bonus certifikty
The principle of a bonus certificate is quite simple. The currency risk for the koruna investor is the exchange rate of the koruna and the reference currency of the underlying asset. The fact that the certificate is issued in euros does not usually play a significant role. The barrier and bonuses of the bv line are determined as the value of the underlying asset. The final return then depends on the development of the underlying asset and the exchange rate of the koruna to me of the underlying asset.

You can also find instruments where the bonus installment is fixed in euros. Bn this procedure is used only for instruments, their underlying asset is the euro, so it is not a problem for the issuer to determine the exact bonus of the line in euros. Once the underlying asset is traded in another currency, then the issuer cannot afford to set a fixed bonus installment in euros, as this would take the currency risk.

Express certifikty
The situation with express certificates is a bit different. The fixed express payment in euros is determined here, regardless of the currency of the underlying asset. In the event that the certificate expires and the full amount is paid, then the exchange rate is represented only by the exchange rate of the koruna and the euro.

Another variant can occur. If there is no temporary payment and the line of protection is breached during the life of the certificate, then the value of the certificate is directly equal to the values ​​of the underlying asset. Thus, for the koruna investor, the exchange rate of the koruna is less than the underlying asset.

Issuers of structured products today rely on who comes up with an interesting product design. In practice, we may encounter many variations and combinations in this example, such as flexi bonus express certificates, etc. Accordingly, it is therefore necessary to assess each instrument individually in terms of currency risk.

Anyone who understands the conditions of a given product will be able to recognize the core of the new risk associated with the tool. As an aid, I recommend pouring two of the most common cases that may occur in structured products:

  1. A fixed fixed amount is paid for the fulfillment of the various conditions. Then the risk represents the exchange rate of the koruna in the currency in which this installment is fixed.
  2. The value of the instrument is calculated according to the underlying asset with a certain participation ratio (it can also be disproportionate). Regardless of whether the minimum or maximum input line is set. In such a case, the investor runs the risk of changes in the exchange rate of the koruna and the underlying asset.

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