Graduation Assignment Academic Excellence Program- Optimal Currency Risk Hedging

In investment management, implementing sophisticated global investment strategies requires careful oversight of local currency exposures. Hedging these exposures is essential for portfolio returns and managing risk. For traders on the Foreign Exchange (FX) desk, hedging goes beyond risk management; it becomes an active investment process requiring precise timing, instrument selection, and cost control. The objective is to align currency hedging decisions with the broader strategy of the asset manager. This approach helps reduce portfolio volatility while occasionally leveraging market opportunities to enhance overall risk-adjusted returns.

Dutch investment managers serving Dutch pension funds have their primary exposure in euros, as they receive pension contributions in euros and pay out benefits in euros. The global investment mandate introduces currency risk due to holdings in foreign assets like stocks, bonds, and real estate. The simplest approach to hedge this risk is a static one: first assess the currency exposure by identifying assets held in foreign currencies, then use a currency forwards and/or swaps to lock in the hedge. Yet, this approach falls short due to its inability to adjust to market volatility, shifting portfolio exposures, and fluctuating hedging costs, leading to inefficiencies.

This research assignment focuses on enhancing this standard approach of static currency hedging to a more dynamic one. There are several ways to pursue this. Currency hedging incurs costs, primarily due to the interest rate differential between domestic and foreign countries. One straightforward but still static improvement is optimising the hedge ratio—for instance, hedging 70% instead of 100% of the foreign exposure. While this introduces some currency risk, it reduces costs and may improve the total portfolio’s Sharpe ratio. Additionally, the timing of hedge adjustments can be optimised. Since the value of foreign holdings fluctuates, the hedge must be adjusted periodically: daily may limit risk but also adds significant trading costs, while over-trading can negatively impact the portfolio’s overall risk-adjusted performance, so finding an optimal adjustment frequency is key.

Currency exchange rates are highly volatile, and various modelling techniques can help estimate future exchange rate values. One approach is to use fair value models to project exchange rates based on economic fundamentals. This assignment involves incorporating dynamic elements into the traditional hedging approach, aiming to enhance performance over the standard static hedge on a total portfolio basis.

The student may choose which aspect of the optimization to focus on, and what models to use. We welcome creativity and are open to all feasible methodologies, be it traditional econometrics, computational finance, machine learning or anything else. For more ideas see references.

Data

Detailed FX spot exchange rates and forward data is available, alongside with macroeconomic data. Bloomberg terminal & API will also be available.

AXP

This assignment is part of the unique Academic Excellence Program (AXP). This program is a cooperation between MN and PGGM, two leading Dutch pension fund service providers. Students will get the opportunity to work alongside investment professionals, collaborate with other students and learn about institutional investing. On regular AXP-days all students in the program will come together in The Hague or Zeist to share ideas, learn from each other, attend presentations from investment teams and discuss job opportunities.

This internship should be scheduled within the first half year of 2025. For this assignment the main location will be PGGM in Zeist where you will be part of the Trading team. You are expected to be in the office about 50% of your time.

For these assignments we are looking for ambitious students with:

• Quantitative background (eg. Econometrics, Mathematics, Financial Engineering, etc.).
• Programming skills in Python.

Are you looking for a challenging graduation internship to develop yourself? Do you want to work in one of the best working environments in the Netherlands? Then we invite you to join our motivated enthusiastic team.

As an intern at PGGM you will receive:

• Travel allowance.
• A monthly internship allowance.
• The opportunity to gain work experience and develop your skills.
• A great team made up of the best professionals in the business!

To apply you can send your CV (including marks) and motivation letter to meryem.el.ajjouri@pggm.nl and/or Recruitment@mn.nl

If you have any questions, please contact Meryem el Ajjouri, Campus Recruiter (+316 51064717 or meryem.el.ajjouri@pggm.nl).