Methodology note
Currency basis and hedges
A currency limit must say which currency a holding is in and how hedges count. By denomination, an ADR priced in dollars is dollar exposure; economically, it is exposure to the issuer's home currency. Hedges can offset the currency they hedge or be left out, and the two choices can turn one book from compliant to breach.
Denomination or economic basis
On the denomination basis, a holding is in the currency it is priced in. On the economic basis, it is in the currency of the underlying exposure, read from a governed field.
The registry's own illustration is an ADR priced in US dollars over a Brazilian issuer: dollars by denomination, reais economically. A position without the economic field falls back to its denomination, and the result counts how many did.
Offset or exclude hedges
With the offset treatment, hedges in the named classes net against their currency at signed value. With exclude, the limit reads the unhedged position and leaves the hedge classes out.
A US equity holding of 500 with a 250 short forward reads 25% of a 1,000 book under offset, and 50% under exclude. The policy has to say which it means.
The hedge ratio
A hedge ratio limit measures the share of a currency's underlying exposure that the hedges offset. It divides absolute hedge exposure by the underlying exposure in that currency. A 320 forward against 400 of dollar assets hedges 80%.
In the registry's worked case, a forward worth 10 with a notional of 1,000 and a delta of 0.5 hedges 500, not 10. With no underlying exposure in the currency there is no ratio, and the result is not applicable, never a pass.
In the example
The ADR and a Treasury are both priced in dollars. On the economic basis the ADR's 150 is reais exposure: 15% of the book, over a 10% band. By denomination the reais weight would be zero.
Worked example
Read economically, a dollar-priced ADR over a Brazilian issuer is 15% reais exposure, over a 10% band; by denomination it would count as dollars.
Rule template:currency_exposure bands: currency=BRL, hardMax=10currencyBasis: economiceconomicCurrencyFieldCode: ECONOMIC_CURRENCY
| Holding | Currency | Market value | ECONOMIC_CURRENCY |
|---|---|---|---|
| Brazilian company ADR | USD | 150 | BRL |
| US Treasury | USD | 250 | USD |
| UK gilt | GBP | 600 | GBP |
| Group | Status | Value | Bounds | Headroom to the hard bound | Code |
|---|---|---|---|---|---|
| BRL | Breach | 15% | ≤ 10% | -5% | ABOVE_HARD_MAXIMUM |
ABOVE_HARD_MAXIMUM: The measured value exceeds the approved hard maximum, beyond any stated tolerance.
Largest contributors: BRL → Brazilian company ADR 15%
Computed at build time by the Acclimetry rule engine (backend commit 8197063); the same code runs in the product.
Questions
Which basis should a policy use?
The economic basis measures the currency risk held; the denomination basis measures the currency of the price. A policy about currency risk usually means the economic basis.
Do hedges count against a currency band?
Only under the offset treatment, where they net against their currency at signed value. Under exclude, the band reads the unhedged exposure.