Advanced Hedging
June 10, 2024
min read
Why You Need Artificial Intelligence to Manage Forex Risk
In today’s forex marketplace, moves can occur at any time of the 24-hour global trading day and happen very quickly. Systems that rely on humans to monitor prices and hedges can no longer keep pace with the modern marketplace.
Matt Esteve

Forex markets are moving around the clock. Humans can’t keep up.

The downfall of Silicon Valley Bank was the lead story in financial news during March.

Bankers and regulators were stunned by the size and speed of the withdrawals that caused the FDIC to shut down SVB. Fed Chair Powell described the event as “an unprecedentedly rapid and massive bank run." Over $40 billion was transferred from SVB in less than 24 hours.

We now live in a connected world where news and information travel at the speed of Twitter. A major problem with SVB was that by the time regulators were fully aware of the situation, it was too late. The FDIC still operates on “banker’s hours," meaning, they close up shop at 4pm and don’t reopen until the following day. This system proved to be ineffective in dealing with the reality of the modern marketplace, as SVB’s bankruptcy was already a fait accompli by the time regulators knew the bank was in trouble.

Forex markets operate around the clock from the Asia opening on Monday until the New York close on Friday. The sheer size of the forex market dwarfs all other financial markets in the world, with an average daily volume exceeding $7.5 trillion. Much of the volume is transacted by algorithmic trading bots programmed to trade based on keywords in news and social media posts. That means that markets can react instantaneously to news or rumors from any source at any time. 

Trying to monitor forex prices around the clock is a daunting task for anyone. Institutional trading firms typically have staff worldwide and pass the trading book from time zone to time zone. While massive corporations have entire departments dedicated to managing FX risk, smaller companies with forex exposure lack the resources to competitively hedge. They are at the whim of the volatility of the markets.

Challenges to Hedging Forex Risk:

  • Hedging is hard. It takes a lot of specialized expertise to comprehend the complexities of Forex and the derivatives used for risk management.
  • Hedging takes time. Most companies delegate hedging responsibility to the treasurer. If they are too small to have a treasurer, that responsibility falls on the CEO or CFO, taking time away from the company’s core business and mission.
  • Hedging can be expensive. Some companies hire additional employees to manage risk, adding to fixed operating costs. Others retain high-priced consultants who often take significant time to develop and implement the appropriate measures..
  • Market conditions change quickly: As noted above, Forex markets are quick to react to news, even news that hits the wires at midnight in New York. To effectively manage risk, someone must be on watch 24 hours a day.

Here’s What is Required to Manage Forex Risk:

  • A thorough risk assessment based on a wide range of scenarios that could pose threats to the company.
  • A monitoring system in place to warn risk managers when action is necessary.
  • Systems designed to act at the speed of today's marketplace.
  • An active hedging strategy that protects against adverse forex movement.

How Ai Can Be an Essential Component in Forex Risk Management:

  • An Ai-piloted platform is in a constant state of readiness. It doesn’t eat, sleep, or take time off.
  • Ai is able to react in real time to changing prices without hesitation.
  • Ai can accurately assess volatility and adjust hedges as necessary.
  • An Ai-piloted platform can give real-time feedback on the current state of all hedges and related financial data.

Is your company ready to stop treating the Forex market like a giant roulette wheel? If you do cross-border business, you are in the Forex game, like it or not. You can hope for the best or prepare for reality: The markets will move.  Changing interest rates, inflation, and geopolitical events will continue to roil currency markets. How much did the Forex movement cost you last year? How much will it cost this year?

Until recently, there has not been a simple way to hedge Forex risk. The time and expense of existing solutions never seemed to pencil out from an ROI perspective. That all changed with the introduction of Pangea Prime. Pangea Prime uses decades of market data to analyze how FX volatility may impact your P&L, allowing you to explore a suite of hedging strategies that are customizable to your specific risk tolerance and budget. 

With Pangea Prime, companies of all sizes can now do the complicated work of hedging.

Schedule a demo today and get the predictability and control you deserve in your business.

Pangea Prime: Predictable, simplified FX management.

Advanced Hedging