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Forex management

NPS to manage FX exposure via derivatives

Oct 30, 2020 (Gmt+09:00)

The National Pension Service will begin to manage foreign currency risk through derivatives trading, as the $690 billion pension fund is aiming to boost overseas investments to over 500 trillion won ($441 billion) by 2024, the NPS said on Oct. 30.

To make the so-called “tactical adjustment of currency holding ratios,” NPS has revised its investment guidelines to allow it to adjust its foreign exchange ratios within plus or minus 5% of its total assets.

It will use foreign exchange derivatives such as currency forwards and swaps to manage its forex exposure, it said in a statement released after a meeting of the Investment Management Committee, its top decision-making body.

NPS will begin the forex exposure management internally in the first half of next year and outsource part of the management to external managers in the second half of 2021.

“By responding aggressively to foreign exchange fluctuations, we will protect our overseas assets against valuation losses caused by foreign exchange volatility,” NPS said.

Forex exposure management means foreign currencies will be added to the list of the South Korean pension fund’s assets under management, following equities, bonds and alternatives.

“Without changing asset allocation … we will adjust the ratios of our foreign exchange holdings from our overseas investments such as equities, bonds and alternatives, with a focus on G7 currencies and the yuan.”

G7 currencies refer to the US dollar, euro, yen, pound, Australian dollar, Swiss franc and Canadian dollar. NPS will use the US dollar as the base currency for its FX risk management.

Since 2018, the NPS has not hedged against foreign currency risk, excluding global bonds which are 100% hedged by US dollars.

The FX exposure management is expected to shore up investment returns at the world's No. 3 pension scheme as its growing overesas assets increase its vulnerability to currency fluctuations. NPS plans to ramp up overseas investment to half of its assets by 2024 when its assets are projected to reach 1,000 trillion won ($881 billion), from 34% at the end of July.

Given the low correlation between foreign exchange markets and other asset classes, FX exposure management is expected to disperse risk and mitigate volatility within a portfolio, it added.

“In volatile financial markets, we will increase the ratio of safe haven currencies while reducing exposure to currency hits by one-off events, to prevent losses from foreign exchange fluctuations,” an NPS source said.

By Jung-hwan Hwang 

Yeonhee Kim edited this article.

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