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Currency positions are taken in the highly liquid currency markets mostly using forwards, Non-Deliverable Forwards and options. Idea generation incorporates a view of country finances and currency flows as well as short term factors like the prevailing risk climate. The portfolio will have exposure to relatively attractive currencies (underweighting those which are less attractive) as well as trading currency pairs (strong vs. weak). The portfolio is made up of directional, relative value, thematic and proxy trades, while carry trades and crowded trades are generally avoided because they can entail higher risk of extreme loss.
Returns are enhanced by shifting target prices and stop losses higher with gains on positions. Portfolio construction is led by the head of the Currency team and targets a portfolio which is diversified between developed and emerging market currencies, whilst also taking a view on total risk. Positions are mark to market for the value of the underlying contract and these and risk factors are monitored in real time. In the past returns have been negatively skewed although the range of excess returns has been high.