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University of Sussex

Barclays’ option dated forwards gave the University of Sussex the flexibility they needed to hedge their Euro currency risks effectively.

  • The Client

    The University of Sussex is ranked in the top twenty universities1 in the UK and is an internationally renowned research institution, with over 75% of the research activity at Sussex categorised as world leading (4-star) in terms of originality, significance and rigour. The University’s research tackles major world issues with leading areas of expertise such as climate change and development studies. Their alumni contains three Nobel Prize winners and twelve fellows of the British Academy. From its inception in 1961, the University has always had an international perspective to its academic activities and outlook.

    1The Complete University Guide (CUG) 2018^

  • The Challenge

    The University receives EU grants throughout the year for the award winning research they are undertaking.

    These grants are issued in EUR but the institution requires GBP. The grants are received periodically throughout the year, with the University having reasonable certainty of the amount of funds they will receive in the next 6 months. However, with fluctuating and unpredictable exchange rates, an increasing concern and uncertainty on what the value of the periodic grants would be, which posed a significant challenge to the University.

    It is also important to note that the dates of these grant payments is not known, this means that the institute is running “spot risk” from when the EU grant is awarded to when the funds are received. Fluctuations in GBP-EUR rates can move favourably or unfavourably for the organisation, a risk the client was not willing to take. Therefore, the University wanted to have certainty over their euro receivables to ensure what they had budgeted, is what they would receive in GBP.

  • The Solution

    As the University did not have oversight of exactly when the funds would be received, they therefore needed flexibility about when the University could exchange the EUR into GBP.

    The solution was to use option dated forwards to hedge their exposure. An option dated forward is a “forward contract” that allows flexibility around when an organisation will take delivery of the funds, it remains an obligation, whilst providing protection from downside risk.

    To minimise transaction risk, the University of Sussex hedged its exposure over an 18-month tenor by entering into a strip of “option dated forward” contracts, with 3-month windows.

    This provided the University certainty over the amount of GBP they would receive, whilst providing flexibility around the date of the exchange. Each contract was booked hedging a decreasing percentage of their known notional exposure (80% for 6 months, 50% for 12 months and 20% for 18 months) As each period matures, the remaining hedges are topped up to the next amount (i.e. the 50% hedge becomes 80%, 20% becomes 50%) and a new transaction is added to 18-month time horizon at 20%.

    This layered approach to hedging allows the institution to increase their cover for their existing forecasts, meanwhile when new grants are won, new hedges are extended forward into future periods. By layering the exposure, it offers a blended rate, and could potentially track the markets closer than simply hedging all the exposure on one day or leaving the exposure in the spot market where the markets can fluctuate dramatically.

Working with Barclays has produced a practical solution to a long-standing problem with uncertainty of dates of receipts of Euros, and now allows us to hedge much of our Euro currency risk effectively!

Allan Spencer

Director of Finance University of Sussex

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