The Currency Exchange Fund (TCX)
The goal of FMO, the entrepreneurial development bank of the Netherlands, is to create and maximise sustainable development value. FMO does this by providing finance to the private sector in emerging markets and developing countries. The currency risk in emerging markets is unacceptably high for international investors, while the local capital markets lack liquidity. However, the currency risk is acceptable where a well diversified portfolio exists. In order to make financing in the local currency feasible, FMO has set up a risk-sharing fund: The Currency Exchange (TCX).
The Challenge
FMO asked Cardano, the fund’s prospective risk manager, for assistance in drawing up the business case, in structuring and in operational implementation. Cardano is to become the fund’s independent risk manager following establishment.
The Approach
In order to substantiate the business case, Cardano performed risk analyses regarding exchange rates and interest rates in emerging markets. In its role as the independent risk manager of TCX, Cardano will use a risk system that has been developed ‘in house’. In addition, Cardano has used its detailed knowledge of risk management and derivatives in organising how the fund will operate.
The Success Factors
The combination of FMO’s years of market experience with Cardano’s knowledge of risk management and derivates proved to be extremely effective in setting up TCX. The fund meets a growing demand for credit provision in emerging markets. At present the fund is able to hedge currency risks related to loans of roughly USD 1.6 billion – and this figure is expected to rise sharply.