Risk Management Case Study, Hedging Currency Risk, Job interview

Question Description

Need full detailed answers to a case study questions below. The deadline is 28 July 2019. Thanks

Aberdeen Private Equity Global Fund of Funds plc is a $120m Private Equity fund https://www.rns-pdf.londonstockexchange.com/rns/3589W_1-2018-7-31.pdf . The fund does not hedge its foreign currency exposures but John, who is Aberdeen’s Chief Financial Officer, is concerned by this approach and would like to explore some alternatives.

1. What foreign exchange (FX) market risk does the fund have as of 31 March 2018?

2.What instruments / securities would you recommend John using to mitigate the FX risk via a hedging program? Please provide expectations of cost profile, protection provided and any other important considerations for each instrument / strategy.

3. If the fund implemented your proposed strategies for hedging, what type of institution would you recommend they go to execute the trades? Can you explain any margin requirements and how the fund might meet them?

4. Your recommended institution has agreed to execute trades but have imposed three covenants on the fund. Please describe why these covenants might be of concern to the institution?

(i) The ratio of undrawn LP Commitments of the Limited Partners to the total financial indebtedness of the Limited Partners is less than 150%.

(ii) The fund’s Net Asset Value declines by 40% or more over any given year.

(iii) Aberdeen Asset Managers Limited is removed as the Investment Manager to the fund.

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