A UK based company invests in commercial real estate in the USA and the UK. The property portfolio is funded using equity and debt. The company has a pipeline of possible acquisitions at any one time.
The company has foreign exchange and interest rate risk.
By analysing the future net income from the portfolio and segregating by currency, the sensitivity to changes in interest rates of various maturities can be calculated. These sensitivity calculations are then used to propose possible hedges. The issue is complicated by the investment pipeline not all of which will come to fruition. However, for those projects that do, there will be a financing need and an ensuing interest rate risk. Thus, an overarching hedge is required after taking due consideration of the cost and flexibility of such hedges and the company’s ability to monitor them.
The analysis of foreign exchange risk was somewhat more straightforward.
The result was a comprehensive model using a spreadsheet containing all the property and debt characteristics. The current market swap rates and foreign exchange rates are updated regularly to produce a summary of the risks faced by the company on a day-to-day basis. This allows the finance director and the owners of the business to monitor their positions in ‘real’ time.