One innovation that most impressed the judges was the bank’s solution to the risks inherent in funding an emerging market operation via an inter-company loan from an offshore parent entity. If this vehicle is unhedged, emerging market inter-company loans create four discrete sources of risk: interest rate risk; FX risk; transferability risk; and sovereign/convertibility risk.
Citigroup has sought to deal with these risks by advising clients to enter into an emerging market inter-company loan hedge with the bank. This enables the parent company to hedge all risks in one transaction.
Put briefly, the parent company issues debt in offshore markets, the debt is swapped into the required company to hedge interest rate and FX risk and the parent enters into a transferability default swap.
According to Jeff Feig, Citigroup’s global head of FX: “Citigroup has put a great deal of effort into investing in people, products and technology that will help our customers to maximise the opportunity and minimise the risk in their FX exposures.”
