Jeff Wilkins, Managing Director of ThinkLiquidity, is a highly respected authority on all matters regarding FX risk management. In this Guest Editorial, Mr. Wilkins details his perspective on how to manage any extreme volatility created by the imminent default by Greece on its debt to the International Monetary Fund.
Just how interconnected is our global economy? For some time now, global financial news has focused on the situation in Greece, which is now nearing a tipping point. But with an economy comprising less than 2% of Eurozone GDP, will Greece sneezing really cause Europe to catch a cold? We are likely to find out soon.
Smart money is on Greece missing its debt repayment this week, and fear is spreading through the market. Global indices immediately slid after the open this weekend, and banks across Greece shut the doors for the week to prevent a run on cash. So you run a brokerage and you ask yourself, what’s next?
Coming fresh off of the January 15th SNB event, it is no surprise that people in our industry are skittish.
Not a day goes by that I don’t hear SNB and Greece in the same sentence. There are, however, major differences between the two events. The SNB decision, though perhaps predictable in a general sense, was unpredictable as to its timing and scope. It caused an instantaneous and unprecedented market reaction. What is happening with Greece has been forecast and analyzed for months, if not years. It will certainly cause market volatility, but it will not be an expected one and done event.
Think back to 2007/2008 – There was the collapse of the carry trade and the succeeding financial crisis. Both of these events absolutely rocked the FX markets, but it ended up being a tremendous time for the brokers that were positioned correctly. When I say “positioned correctly” I do not mean long or short a particular currency pair.
I am talking about being long volatility. As an industry, we are all long volatility, but being positioned correctly means being long volatility in a controlled manner. You may be asking, “how can you be in a controlled long volatility position”. The simple answer is the A book/B book/C book ratio, optimization levels, and a strict NOP with exhaust hedging being sent to a counter-party that has a larger risk appetite. This is a living breathing process that requires constant 24-hour attention.
We may not know what the market ramifications of events in Greece will be, but we do know they are coming soon. These events should not catch brokers unprepared like the SNB decision. Now is the time for brokers to put controls in place that not only mitigate downside risk of volatility, but maximize the profit making potential of these events. If handled correctly, the coming months will be a very lucrative time for our beloved industry.
This is a Guest Editorial which was compiled by, and represents the viewpoint of Jeff Wilkins, Managing Director, ThinkLiquidity