Alpha Group International plc

Introduction to FX Risk Management

ALPHA GROUP INTERNATIONAL PLC OUR BUSINESSES INTRODUCTION TO FX RISK MANAGEMENT

Our Businesses
The possible solutions will consider the commercial
risk posed to the business because of volatility
itself (indicating what an organisation needs to do

FX Risk Management to protect themselves), the cash position and credit

worthiness of the business (indicating what they can
afford to do), and the risk appetite and commercial
objectives of the decision makers (indicating what
WHAT WE DO AND WHO WE DO IT FOR REVENUE FY2022 (£) they would like to do).

£69.5M
Our FX Risk Management division focuses on When considering the answers to the above, it’s
supporting corporate and institutional clients important to first consider what “bad” looks like.
that need to buy or sell currency for commercial Essentially this falls into one of the two camps
purposes, either from buying and selling goods and mentioned above: under-hedging (hedging too little,
services overseas, or from the underlying value of an (2021: £57.1M)
including nothing) or over-hedging (hedging too
asset or liability. much). For organisations that are hedging cash-flow
CLIENT NUMBERS Alex Howorth
forecasts, the implications of under or over-hedging

1,047
The clients that we support are regularly impacted by Group MD, FX Risk Management
can be significant. For corporates it can materially
movements in exchange rates, creating material risk impact their purchasing and pricing power; and for
that can significantly impact their performance and funds it can impact their investment performance. In
profitability. We support them by providing strategies Some examples of the questions that decision both cases, this results in reduced competitiveness
and technologies that enable them to mitigate risk makers continuously need to consider when hedging and profits. Additionally, over-hedging can also lead
(2021: 881)
by managing currency volatility more easily and include: how to fix the rate and how not to, when to to margin calls that result in cash-outflows that can
effectively. fix the rate and when not to, how much is too much, negatively affect the business.
% GROUP REVENUE
and how much is not enough. Only by answering

71%
We service a highly diversified client base through these questions correctly can decision makers The aim is to ultimately get the balance right and
our Corporate and Institutional teams in London, ultimately avoid the problem of under or over- ensure that profits aren’t unnecessarily eroded,
Toronto, Amsterdam, Milan, Bristol, Sydney and hedging. commercial objectives aren’t unnecessarily
(imminently) Madrid, and our revenues are derived obstructed, and the day to day running of the
from executing forward, option and spot contracts ii. What ‘good’ risk management looks like business is not negatively impacted. Understandably
on a matched principal basis. We are sector To develop a well-balanced hedging solution, the this is easier said than done. Part of the difficulty
WHAT PROBLEM ARE WE SOLVING?
agnostic, in a non-cyclical market, working across a first step is to start with the business itself. We in answering these questions and striking the right
multitude of currencies and continents, and are thus To understand the distinctiveness of our model, cannot, with any integrity, propose a solution to a balance stems from the fact that decision makers
highly diversified. We estimate the global market one must first understand the following three business without understanding how their business are faced with a web of complexity and distraction
opportunity for our FXRM division to be worth c. considerations: (i) the ongoing challenge that works. Thus, our primary focus is to obtain a deep from the FX market itself.
$170bn in revenue terms, meaning we are barely businesses with a recurring exposure to currency understanding of an organisation’s operating
scratching the surface. volatility are faced with, (ii) what a well-balanced model, any supply chain considerations, their target iii. Fear, Greed, & Sub-Optimal Decision Making
hedging solution looks like, and (iii) the set of FX- market, competitive landscape, profit margins, cash FX is unpredictable and volatility is not linear. As a
related conditions that create a web of complexity, and constraints (cyclical or not), pain points that make result, whilst there is risk from unfavourable volatility,
often suboptimal decision making, for businesses to the day-to-day operations harder to navigate, and, there is also “opportunity” from favourable currency
MARKET AT A GLANCE navigate through. importantly, the core commercial short, medium, and swings. It is not uncommon therefore for businesses
long-term objectives of the key decision makers and to be driven by a desire on the one hand to protect
$170bn global revenue opportunity 1 i. The challenge our clients face owners. their margins, and on the other, to increase their
Non-banks hold a fraction of the market Any organisation with an ongoing exposure to currency profitability. The combination of both introduces
volatility must continuously and appropriately This understanding gives us a base foundation from two quite strong emotional drivers into the decision-
<0.05% market share globally
determine how to protect their business against which a strategic hedging programme can then be making equation – fear and greed – an age-old
the risk that currency volatility creates. This can built. The next step is to determine how to protect human problem which negatively influences the
range from hedging firm commitments, through to the business against currency volatility itself. At this performance of a hedging strategy.
1
Estimate based on Mckinsey Global Payments Report 2022. hedging cashflow forecasts. The latter of these is point we want to explore the following questions: (i)
more complex, and where clients naturally face the how much to hedge, (ii) which instrument to use, (iii) When faced with such unpredictability, the one thing
biggest challenge – and this is where Alpha focuses its when to hedge, and (iv) how often to revisit these that people will often seek the most is reassurance.
proposition and differentiates itself the most. questions. Often however they find this in the wrong places.

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ALPHA GROUP INTERNATIONAL PLC OUR BUSINESSES INTRODUCTION TO FX RISK MANAGEMENT

FX Risk Management
Continued

As such it’s quite normal for decision makers to seek undesirable exchange rate in the future – hence the If this approach is fundamentally flawed though, why And in terms of sustainability – we believe it is easier
counsel from those “in the know” about which way gamble. Despite the odds being firmly against the don’t more providers choose to challenge the short- to keep the clients you have, by providing sound risk
the market is likely to move. This usually comes in client, these instruments remain highly alluring to term cycle? The answer to this is simple – people are management advice that delivers consistent results
the form of market commentaries or forecasts, and many. human with emotional drivers that are unfortunately over the long-term.
despite this approach producing suboptimal results easy to sell to, and the commercial opportunity to
when measured over the medium to long-term, to The final challenge relates to the ongoing conflict of monetise this with short-term market opinions and/ Ultimately, by avoiding the path of least resistance,
this day it remains the default service offering by interest created by the traditional commission model or speculative products, is inherently easier and we set out to remain a business that is long-term,
both banks and non-banks alike. within non-banks. Notably, the immediate short-term lucrative in the short-term. high-growth, and a global leader in its space.
earning potential for the individuals involved in the However, by leaning into a more difficult path
sale and dealing of FX, often stands to compromise HOW WE DIFFERENTIATE – “THE ALPHA WAY” our challenge becomes, how can we navigate
“When faced with such the integrity of their hedging advice in terms of it successfully? This comes down to three core
timing, quantum, and product. If the traditional way of doing things is easier, why components: our Business Philosophy, our
unpredictability, the have we chosen a more difficult path? Ultimately Performance Culture, and our Remuneration System.

one thing that people The conditions that our clients face can therefore be
summarised as follows: significant sums of risk linked
this comes down to three things – integrity, purpose,
and sustainability. In terms of integrity – we know the PILLAR 1. OUR BUSINESS PHILOSOPHY
will often seek the to a recurring business decision, overseen by human
beings who are prone to making imperfect decisions,
short-term model is not in the long-term interest of
our clients. In terms of purpose – we are genuinely Over the past fourteen years we have made it our
most is reassurance. linked to a variable that is hard to predict and can
both boost or cripple performance, with instruments
passionate about solving the problem of currency
risk for our clients; in an industry fixated on the
mission to distinguish ourselves away from the short-
term, FX-focused, and sales-led services that have
Often however they that vary wildly and can be difficult to understand, direction of FX markets and being part of the fanfare always been abundant in the market. We have sought

find this in the wrong

and influenced by advice that often has a short-term that surrounds them, we are proud to be different to challenge preconceived ideas of what “good” looks
focus and can be self-serving in nature. If it sounds and have a clear vision to become the global leader like by prioritising the commercial development and

places.” like a lot, it’s because it is! in FX risk management. acumen of our people, and engaging in conversations
that seek to genuinely understand our clients’
The Short-term Trap businesses and what they truly need, rather than
In our experience, most banks are more passive and Collectively the problems outlined above serve to what they might want, or have become accustomed to.
risk averse, sending generic in-house forecasts and fuel fear and greed tendencies, and subsequently
analysis en-masse to their customer base, usually via suboptimal decision making, at a time when a Risk management led
email. Our non-bank competitors on the other hand balanced and strategic approach to managing Our approach to managing currency volatility is risk
typically actively engage in providing businesses currency is often needed the most. We refer to this management led, not FX market led. We know that
with personal predictions and opinions, as well as the Short-term Trap. nobody can reliably predict the currency market,
as producing generic commentary and in-house and to pretend otherwise would compromise our
forecasts. The obvious question to ask is, if the Short-term clients’ commercial objectives. Our belief is that any
Trap leads to such suboptimal outcomes, why then conversations around currency markets and “when”
Adding to the complexity is the plethora of financial does it persist? Ultimately, the answer to this lies in to buy should only take place after a clearly defined
instruments available to businesses, which can the fact that international businesses will always be risk management strategy is in place. It is for this
also be placed into one of two camps; (i) genuine faced with a recurring decision to buy or sell currency reason, that we don’t consider ourselves, nor position
risk management products with a commercial (this will never go away), and as long as that decision ourselves, as FX market experts, and therefore unlike
purpose, and (ii) speculative products that are akin remains intrinsically linked to a live moving variable our peers, since inception we have never published
to gambling. Regarding the speculative products, (FX rates), it will continue to create the conditions FX market commentary, analysis or forecasts. In fact,
these instruments serve no logical purpose in a for success or failure. Furthermore, in an industry we don’t believe the notion of an FX market expert
genuine risk management strategy, and tend to offer where FX providers and the global media continue even exists or carries any legitimacy at all.
immediate short-term benefits by providing a more to indulge and promote FX market forecasts and
favourable exchange rate today, at the expense commentary, a convention is established that lures
of committing the client to a potentially more business into believing there is genuine value and
credibility in relying on them.

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ALPHA GROUP INTERNATIONAL PLC OUR BUSINESSES INTRODUCTION TO FX RISK MANAGEMENT

FX Risk Management
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A risk management culture, like Alpha’s, versus one client’s business dynamics, competitive environment, A winning mindset Ultimately our people are our most treasured asset,
that indulges market commentary and forecasts, are and commercial objectives, in order that we can Across all divisions and departments, we want and we demand a lot from them. For our people-led
mutually exclusive and deliver distinctly different then tailor appropriate risk management principles to be considered exceptional at what we do and model to remain sustainable it’s imperative we invest
outcomes. to their unique circumstances. Only by adopting this pursue excellence in every field. Throughout the in them appropriately.
approach can a well-balanced hedging strategy be organisation, we emphasise that, whoever you are
achieved. and whatever role you play, we all have an obligation Summary
“Our philosophy Summary
to achieve and uphold a reputation of excellence. Our
people knowingly sign up to this when they join, it is
In any high-performing sports team, what separates
those who finish first, from those who don’t, is
has always been to Our business philosophy intrinsically takes us down one of our most important guiding principles and, their intent. Individually and collectively, they train

avoid the path of

a more challenging path, but we believe this leads to unsurprisingly, it is not for everyone. that extra bit harder, they create a culture where
more meaningful and sustainable results. By forging 1% improvements are both valued and sought out,

least resistance and long-term relationships with our clients based on

value, credibility, and trust, the rewards that follow
Enjoying the journey
Performance environments can be mentally and
they empower and elevate one another, and they
constantly look to invest in areas that will make the

challenge clients on (which are proven to compound overtime) create

strong earning potential for our people, and strong
physically taxing, and we don’t want our people to
become slaves to performance or burn out. Thus,
boat go that little bit faster. We subscribe to the
belief that business is no different. It’s one of the
what they need versus sustainable value for our investors. Everyone wins. we place a huge amount of importance on the main reasons we have established an exciting and

what they want.”

third sub-component of our performance culture, long-standing relationship with a world-renowned

PILLAR 2. OUR PERFORMANCE CULTURE which is ensuring this journey remains enjoyable for performance coach, Dr Ceri Evans, who, in addition
everyone. Yes, we want to get better, and yes we want to Alpha, works with some of world’s most respected
Our second core component is our performance to operate at an elite level, but we also want this to and successful sports teams.
culture. We are relentlessly committed to cultivating be fun – not least because we believe enjoyment is
Keeping it simple a team-oriented performance environment that runs an integral ingredient to performing at a higher level.
In terms of the hedging products we recommend through the entire organisation. We believe highly
to our clients, we know that, used in the right way, effective, team-led systems drive higher levels of
simple products are, in the vast majority of cases, performance, versus a cluster of highly talented
far more effective than complex or speculative individuals working independently and focused on
ones at managing currency risk. To support this self-interest. But team-led systems need organising, DIFFERENTIATION AT A GLANCE
ethos, we incentivise our people by deliberately they need direction, and they need purpose – our
paying significantly lower rates of remuneration performance culture is our second core component
on more complex products, whilst celebrating and THE TRADITIONAL WAY THE ALPHA WAY
and acts as a central pillar in helping us achieve this.
over-rewarding scenarios where we successfully It has several sub-components, the first of which is
talk clients down from more complex ones, to using development. FX Market “Experts” Risk Management Experts
simple ones. Our philosophy has always been to
avoid the path of least resistance and challenge Everyone’s getting better Sales & FX market conversations Business & risk management conversations
clients on what they need versus what they want. In many organisations, development is something
which is reserved for more junior people, and the Publish market predictions & commentary Avoid the noise and distraction of the markets
Business conversations not sales conversations more senior you become the less you are expected
Effective strategy requires a deep understanding to develop. We do not subscribe to this notion, and Recurring revenue targets No recurring revenue targets since inception
of how a client’s organisation works, in order to instead our focus on development is both top down
diagnose their challenges and build an appropriate and bottom up, from our most entry level people, to Promote complex products Promote simple products
solution. This cannot be achieved by talking to a our most senior. By creating an environment where
client about their generic “FX requirements” only everyone is getting better, seeking out their next level Sell clients what they want Sell clients what they need
to put forward a pre-conceived FX solution. This is of performance, and addressing inconvenient facts
just a sales conversation. What is needed instead or uncovering uncomfortable truths, we continuously High volumes of low-value clients Low volumes of high-value clients
is a business conversation – one that evaluates the elevate our collective potential.

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ALPHA GROUP INTERNATIONAL PLC OUR BUSINESSES INTRODUCTION TO FX RISK MANAGEMENT

FX Risk Management
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PILLAR 3. OUR REMUNERATION SYSTEM OUR STRATEGY

Our remuneration system is the third component of Our (i) Business Philosophy, (ii) Performance Culture
our model and is designed to both complement our and (iii) Remuneration System ultimately serve to
business philosophy and regulate our performance create what we call our “economic moat” – a term
culture. originally coined by Warren Buffett to describe a
business’ ability to maintain a competitive edge over
As a fast-growing business with growth expectations its competitors.
from investors, one could envisage a conflict
between our long-term principles and results- i. Our Business Philosophy
oriented environment. We however feel the two are Helping our clients ignore the “noise” of the FX
aligned and show this through strong leadership markets and providing them with effective, long-
and a clear cultural direction. We then reinforce our term, commercially focused FX risk management
approach with very deliberate and well-designed strategies.
remuneration structures.

ii. Our Performance Culture

Despite our strong track record of growth, since Fostering a high-performance environment where
inception, our Front Office employees have never everyone is getting better, delivering to a high
had a recurring revenue target for existing clients – standard, and having fun along the way.
not at the individual client level or across their wider
portfolio. We believe this is not only unique in our
iii. Our Remuneration System
industry, but also in sales environments. Instead,
Remuneration that is aligned to the long-term
we opt solely for monthly new business targets that
interests of our clients, with no recurring revenue
are deliberately modest and static. We believe this
targets at a portfolio or client level since inception.
approach is critical in driving the right behaviour
at the outset of a new client relationship and in
Given the size of our market opportunity, our strategy
delivering consistent positive client outcomes over
is therefore largely focused on the following three
the long-term – which then leads to high levels of
areas:
retention. Ultimately, we want our people to prioritise
client retention and acting in the long-term interests
1. Exporting our Business Philosophy and
of their clients, rather than be influenced by the need
Performance Culture overseas – we will continue to
to hit a short-term recurring revenue target.
ensure the Alpha ‘watermark’ is exported into new
overseas markets.
We also use remuneration to both incentivise and
disincentivise our people relative to the complexity
2. Attracting, developing and retaining exceptional
of the products they sell (i.e. the more complex
people – we will continue to build a highly talented
the product, the lower the remuneration). We
team where everyone is getting better.
believe in most instances the simplest solution or
product should always be prioritised, which often
3. Innovation focused on enhancing our service
means less revenue today, but more over time. In
offering and operations – we will continue to improve
an industry where the sale of complex products is
the effectiveness and efficiency of both our client
often overly rewarded, and the people that sell them
offering as well as our own internal operations.
are pedestalled as experts, this is a key cultural
difference.
Alex Howorth
Group MD, FX Risk Management

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LONDON (HEAD OFFICE), UK

AMSTERDAM, NETHERLANDS

LUXEMBOURG CITY, LUXEMBOURG

BRISTOL, UK

MILAN, ITALY

TORONTO, CANADA

SYDNEY, AUSTRALIA

VALLETTA, MALTA

Regulatory Information

Alpha Group International plc (LON:ALPH) is listed on the London Stock Exchange and trades through its wholly owned subsidiaries
Alpha FX Limited (Company Registration No. 05108142) and Alpha FX Europe Limited (Company Registration No. C 96623).

Alpha FX Limited is authorised and regulated by the Financial Conduct Authority to provide regulated products and services
(Registration No. 770377) and authorised by the Financial Conduct Authority as an Authorised Electronic Money Institution
(Registration No. 900849). It is also registered with FINTRAC in Canada (Registration No. M18265420), registered with the Revenu
Quebec as a Money-Services Business (Licence No. 12675), and licensed by ASIC, the Australian Securities and Investment
Commission (AFS Licence No. 541102).

Alpha FX Europe Limited is authorised and regulated by the Malta Financial Services Authority to provide investment services
in terms of the Investment Services Act (Cap. 370 of the Laws of Malta) and for the issuing of electronic money and provision of
payment services under the Financial Institutions Act, (Cap. 376 of the Laws of Malta).