Currency Exposure on an Order Book

How to read this sheet

The amplification figure is why a rate move that looks small is not. Revenue is entirely in the quoted currency and only part of the cost is, so most of a move reaches margin undiluted - and margin is a thin slice of revenue, so it arrives as a large percentage of a small number. It is a first-order sensitivity: accurate for the moves that happen in a week and an overstatement for large ones, because the revenue it divides by moves as well. On the seeded book a 2.60% move produces a 20.1% fall in margin against the 19.6% the factor alone would suggest. Exposure is net of the inputs bought in the same currency, and cover sold against the gross receivable is by that much a position rather than a hedge. Where the quoted currency trades at a forward premium the excess earns carry and reads as free money, which is the reason it persists - but a directional bet earning carry is still a directional bet, and it is the same bet whether or not it was described as one. What is not modelled: the timing mismatch between when cover matures and when money actually arrives, which is where most hedging losses in this industry are made rather than in the size of the position; orders quoted but not confirmed, which are an exposure of a different kind because they can be repriced; the credit risk that turns a receivable into nothing at all, at which point its cover becomes a naked position; and the possibility of pricing in the local currency, which removes the question rather than answering it and is worth more than any hedge if a buyer will accept it. The break-even rate for a single quotation is on the buyer quotation sheet; this one answers the questions a book raises that a quotation cannot.