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Tuesday, 23rd April 2024
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New euro era: the stuff of dreams Back  
The start of phase II of EMU brings about possibilities for hedging and risk management that treasurers in Ireland could only dream about up to now.
In the past the size of the Irish pound market made the use of more sophisticated instruments impractical for corporates. With the euro and a wider and deeper capital market, such products are within reach. The possibilities can be classified under 3 headings, currency based yield enhancement, hedging structures and view taking strategies.(Brian Brady, of Ulster Bank Markets, outlines the approach his bank is taking to these new opportunities on page 16.)

For example, yield enhanced deposits will be available which will allow investors to improve the return on cash assets if a particular currency view is realised. The incentive for a treasurer in accepting a lower return on an investment as a worst case scenario, is that if your view is realised you can significantly enhance the return you would otherwise receive. Other examples of yield enhancement type products are a range accrual deposit, a dual currency deposit and a resettable range deposit.

Hedging structures and strategies can now be much more diverse, with a much greater variety of instruments for adding value to foreign exchange dealings now available. Many treasurers have increasingly complex requirements, which cannot be satisfied using conventional spot and forward foreign exchange trades. As a result, foreign exchange option structures will become more prevalent, and will be much more of a common feature of every-day risk management than they have been in the past, as well as being used to provide customised structures for one-off transactions.

On foreign exchange margin trading, for high net worth individuals who wish to add value to their personal portfolio, this facility will be of interest. This form of trading is built on the concept of personal leverage, with a client required to deposit a relatively small sum, usually a predetermined percentage of the agreed trading facility.

The euro will result in a reduction in the core cost of funds to borrowers in Euroland. The perennial problems which the Irish pound market experienced should now be consigned to memory, as treasurers can operate with a degree of certainty as to the level of liquidity in the market.

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