On EM FX risk management during policy divergence

asked by u/astoica · 2d · 2 answers

Still trying to get my head around how seasoned players manage risk in EM FX when you've got central banks moving in opposite directions, like we saw with some LatAm hikes versus the dovish stance from developed markets for a while. Specifically, for those running multi-currency books, how do you practically size your exposure to, say, $BRL or $MXN, when the rate differentials are widening but the global macro picture isn't necessarily screaming 'buy EM'? Are you just leaning on the carry and hoping for the best, or is there a more nuanced approach to hedging that volatility beyond just buying vanilla puts?

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  • u/range_rider_yuki· 1 pts· 1d

    That's a good question. Many experienced players I know lean heavily on a robust VaR model, often supplemented with stress testing specific scenarios, to gauge their exposure to those divergences. It's not just about the rate differential, but also the potential for capital flight if the narrative shifts.

  • u/felipe2· 0 pts· 1d

    That's a great point about the practicalities of sizing. Beyond just rate differentials, I wonder how much the market's perception of political stability and external account vulnerability in those EM countries influences the actual risk premium demanded, even with attractive carry.

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