Margin-free FX Hedging

What is margin-free hedging?

Margin-free hedging is the ability to place a hedge without posting a margin against the position as collateral.

FX Hedging, using FX forward contracts for example, typically requires a margin to be posted against that position as collateral.

Further, if the initial margin no longer covers the mark-to-market of a hedge, due to movements in the spot rate, the firm may be required to post additional, variation margin.

One approach to resolve this issue is to trade via an uncollateralised FX facility – margin-free hedging. This means you can hedge using forwards and not worry about posting margin.

 

What are the benefits of margin-free hedging?

1. Reduced FX liquidity risk – Eliminates the potential liquidity risk associated with posting capital as collateral
2. Reduced cost – Removes the cash drag associated with placing a margin, often a hidden cost

E.g. If a funds’ expected returns are 8%, then an investment of $100m should yield $108m. If 10% of investible capital is held back for margin or contingent liquidity, then the remaining $90m must generate a return of 20% to get to the same figure.

 

How to access margin-free hedging

New technology and solutions are now available to fund managers and corporates to access margin free hedging.

Here at MillTech, we provide margin-free hedging with transparency at the core. Removing the need to post initial or variation margin on FX forwards and freeing up capital to increase operational efficiency, all whilst supporting best execution. To find out more about our end-to-end solutions, get in touch here.

 

Related terms:

• FX Hedging
• FX Risk Management
• FX Liquidity 
• Currency Forward