The Handbook of Corporate Financial Risk Management (2nd Edition)
First published:
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Managing the Depegging Risk
Managing the Depegging Risk
Foreword
Introduction
Theory and Practice of Corporate Risk Management
Theory and Practice of Optimal Capital Structure
Introduction to Funding and Capital Structure
How to Obtain a Credit Rating
Refinancing Risk and Optimal Debt Maturity
Optimal Cash Position
Optimal Leverage
Introduction to Interest Rate and Inflation Risks
How to Develop an Interest Rate Risk Management Policy
How to Improve Your Fixed-Floating Mix and Duration
Interest Rates: The Most Efficient Hedging Product
Do You Need Inflation-linked Debt?
Prehedging Interest Rate Risk
Pension Fund Asset and Liability Management
Introduction to Currency Risk
How to Develop Currency Risk Management Policy
Translation or Transaction: Netting Currency Risks
Early Warning Signals
How to Hedge High Carry Currencies
Currency Risk on Covenants
Optimal Currency Composition of Debt 1: Protect Book Value
Optimal Currency Composition of Debt 2: Protect Leverage
Cyclicality of Currencies and Use of Options to Manage Credit Utilisation
Managing the Depegging Risk
Currency Risk in Luxury Goods
Introduction to Credit Risk
Counterparty Risk Methodology
Counterparty Risk Protection
Optimal Deposit Composition
Prehedging Credit Risk
xVA Optimisation
Introduction to M&A-related Risks
Risk Management for M&A
Deal-contingent Hedging
Introduction to Commodity Risk
Managing Commodity-linked Revenues and Currency Risk
Managing Commodity-linked Costs and Currency Risk
Commodity Input and Resulting Currency Risk
Offsetting Carbon Emissions
Introduction to Equity Risk
Hedging Dilution Risk
Hedging Deferred Compensation
Stake-building
In this chapter we tackle a similar problem to Chapter 18, where we described a model that allows companies to increase the hedging proportion of revenues from high-carry currencies at moments of crisis when the pressure on the currency increases. In both cases, we must be realistic in our expectations, and realise that no such model will be perfectly accurate, because, by their very nature, crises are unpredictable.
The problem that we tackle here is even more difficult, as our goal is to predict the moments when the currencies that are pegged (usually with regards to USD) are under pressure to abandon the peg and move towards a free-floating regime. What makes this situation more challenging is the fact that the pegs are usually in place for a period of many years, and therefore the depegging data is scarce and not recent.
PEGGED CURRENCIES
As an example, in Figure 24.1 and Table 24.2 we show the historical depegs of three volatile currencies against the USD: KZT (Kazakhstani tenge), NGN (Nigerian naira) and EGP (Egyptian pound).
It is easy to note that the depegs are generally very violent, and in some cases cause the currency to collapse more than 100%, expressed as
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