Currency Overlay


currency-globeCurrency overlay programs are committed to the management of current currency risk in a portfolio; currency exposures are looked upon as a distinct choice from the comprehensive asset distribution. The goal of currency overlay programs is to restrict losses and optimize gains that occur from currency risk.

In the context of the volatility of exchange rates, it is expected that investments in global equities are unpredictable. Currency risk can have an adverse effect on a portfolio that contains foreign denominated stock.

Investment in foreign denominated currency results in additional risk to portfolios. However, currency overlay programs can reduce the risks, while some result in profit opportunities.

The overlay programs are committed to the management of current currency risk in a portfolio. However, a currency overlay program is not a direct investment. It is a risk management program executed with derivatives that do not need an asset distribution.

Currency overlay can be passive/active. A passive overlay is not very complex. A comprehensive hedge of the currency exposure is established and efficiently transforms the complete foreign exchange exposure into the base currency. The emphasis of such a strategy is to remove the risk. This method does not look at supplementing additional return to the portfolio. By flattening out the peaks and valleys in asset values because of currency changes, a passive currency hedge removes all the risk due to exposure to foreign currency. It delivers improved stability to asset values.

A passive currency overlay is implemented utilizing basic derivatives, especially futures, forwards, and swaps. The advantages of passive currency management occur from the total effortlessness of the strategy.

A portfolio is safeguarded from any unfavorable fluctuations in foreign currency. This would enable the investor to assume more risk in other asset classes. The fees are also less since the strategy has been passive and depends on standardized derivative contracts. Though passive overlay programs are correct for certain clients, they are very basic in nature and structure.

Active overlay programs seek to decrease losses from foreign currency exposure.  For a normal currency overlay execution, an initial hedge ratio is established. The initial hedge ratio is identified on a portfolio specific basis by looking at factors like clients’ assets, liabilities and liquidity requirements. The part of the portfolio that is not hedged is then actively managed to create alpha by manipulating currency fluctuations.

Currency overlay programs could be of use to investors who are concerned about the currency risk that is a part of international investments. Passive and active programs are available to meet the objectives and risk tolerance of every specific plan. Before pursuing an overlay program, investors must prudently assess their overall asset allocation, future liquidity requirements, and investment policy guidelines to determine if an overlay program is appropriate.

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Mortgage Banking


mortgagebankingIn order to cater to the increasing needs for regulatory compliance, mortgage banks must adopt a wide-ranging method to compliance risk management (interfacing regulatory analysis, determining contesting regulations, incorporating operational process controls, managing data quality, and planning documents management).

Mortgage banking stakeholders comprehend the challenges, while adhering to transforming regulations and requirements from government regulators, government-sponsored enterprises (GSEs) and investors. Regulatory compliances impact the complete life cycle of originating and servicing a mortgage loan. The emphasis is on data quality related to decision-making, calculations, and analytics.

An organization cannot be looked upon as being compliant with a procedure unless it delivers proof of the functions, procedures and data represented by the rule. In order to prove “evidence of compliance”, an organization must record the connection between compliance rules, calculations conducted, and data derived.

There exist five critical components of managing a compliance program that delivers evidence needed to reduce compliance risk:

Regulatory Interpretation

Compliance is related to a comprehensive documentation of regulatory, investor, state and corporate needs. It is directly connected to the operational processes, data, and reports impacted by a distinct requirement. The process is handled by a team of stakeholders to bridge the gap between business and technology. The stakeholders collaborate with business, legal, IT and compliance personnel to interpret and record regulatory needs.

Regulatory Controls

It facilitates the interpretation of regulations being translated into related business processes. It needs a comprehensive process design, control, and management. Efficient process controls also need a robust elucidation of the process, an effective understanding of the key points of control and proper reporting that particularly addresses the key control points.

Exception Management

An effective process control and monitoring system would result in business process exceptions being reduced.

Data Integrity

 The effective execution of the previous three components would have a major impact on data quality. It is structured to facilitate the veracity and flexibility of data across the life cycle. The data quality is validated by the integrity of the source.

Event Data

 At the time of origination, servicing and default management, a loan transits via multiple stages and critical processing outcomes. It is vital for the data to be documented at the same time as the occurrence of the event to ensure compliance afterward. For instance, during the origination process, a distinct fee is modified in excess of an elucidated ceiling, the modified values along with the event are managed and used in compliance reporting.

Data Transfer

 Identify the perfect source system for specific elements and effectively transfer the data elements to a centralized repository. The lack of accuracy during the data transfer process is a vital reason for bad data quality. It needs inefficient initiatives to integrate the data later on.

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