IPC defines and enforces the firm’s investing philosophy based on diversity, quality, and long-term thinking. The IPC delivers investment and financial strategy guidance, establishing standards that the management can use to generate customized proposals and plans for their objectives. The recommendations for this pension firm include investing in companies that operate in the Sterling pound, setting portfolio limits and finally, buying stock in a diversified market.
The money management firm should invest in companies that operate solely in Sterling pounds to hedge the risk. One approach to mitigate this risk is to use the currency swap market (Segal, 2021). According to Segal (2021), currency swaps protect against the danger of susceptibility to exchange rate changes while ensuring foreign funds’ reception and achieving greater lending rates. Currency swaps are made up of theoretical principles that are swapped at the start and end of the contract. Essentially, this capital is never returned; it is utilized to compute interest rate repayments. Despite the current economic crisis and sanctions, the Sterling pound has continued to rally high against the Euro and Dollar. The GBP/USD exchange rose sharply from the North American open and aimed to reclaim the 1.36 level (Skinner, 2022). Furthermore, Sterling has seen a long-term change in currency pricing. One would think that the world’s strongest economy would have the world’s strongest currencies, but this is not necessarily the case. Generally, the pound is more valuable than the US dollar because long-term fluctuations in currency prices are more significant than exchange rates.
Another recommendation is to limit the maximum amount of investment in the portfolio (portfolio limit). Despite the risks, the money management firm invests 10% equivalent of $ 100,000,000, in foreign companies that deal solely with the Eurozone. Modern portfolio theory (MPT) excels at supplying the statistics needed to diversify and extract the most efficient risk/reward from the current market (Lukomnik & Hawley, 2021). Regulators can constrain the range of allocation techniques available to individuals tasked with pension fund management obligations by placing quantitative restrictions on investment. For instance, the IPC can suggest a cut of 5% to the current amount so that only $50,000,000 is invested, thus, limiting the risks. They can also diversify by incorporating nations operating various currencies instead of the single Euro. Maximum levels of investment (ceilings) may be included in legal rules to the degree that they are compatible with and support the prudential principles of liquidity, stability and profitability. Additionally, a checklist of accepted or suggested financials, exchange rates and assets can also be included in provisions. Overall, certain types of operations may be carefully controlled within this context.
The last recommendation for the money management firm is to buy foreign stocks in a diversified portfolio. The most straightforward and general approach to investing in international markets is purchasing exchange-traded funds (ETFs) or mutual funds that carry worldwide equities and bonds (Kuepper, 2021). Essentially, these give the portfolio a rapid and highly diverse global element by owning overseas assets across various nations and sectors in a single trade.
In brief, the money management firm can hedge the risk by shifting to a new currency, limiting their current portfolio and diversification. Due to the obstacles, international investing might be difficult. Nonetheless, most financial advisors urge that investors diversify their investments with at least some global equities and remain open to change. Generally, this will spread the risk and enable the company to adapt to the economic crises.
References
Kuepper, J. (2021). The best ways to invest in foreign markets are with ETFs and ADRs. The Balance. Web.
Lukomnik, J., & Hawley, J. P. (2021). Examining the limits of modern portfolio theory. Top1000funds.com. Web.
Segal, T. (2021). Hedging risk with currency swaps. Investopedia. Web.
Skinner, J. (2022). Pound / Dollar rate finds feet, but risks remain, some analysts say. Pound Sterling Live. Web.