By Tanja Zimmermann
Photo © energepic.com // Pexels
Consultants are identifying a growing interest of companies in AI-based hedging of financial market risks. The reason for this is clear. Artificial intelligence can be used to calculate more precise forecasts of future exchange rate developments and thus optimize hedging recommendations, a business consultant explains. One application is offered by 21strategies which developed an AI technology for the optimal hedging of financial market risks such as currency, interest rate and commodity price risks. With its SaaS, the firm aims to support CFOs, treasurers and commodity purchasers in their decision-making and thus strengthen the financial resilience of companies.
Probability forecast and algorithmic decisioning with AI improve FX hedging
Essentially, 21strategies' AI technology estimates the probability of future forward rates. Based on this, the optimal hedging or commodity buying decision can be computed under observation of corporate constraints such as allocation period or risk appetite.
21strategies' AI technology recommends hedging decisions based on the external macroeconomic situation and the hedging strategy of the respective company, according to CTO Dr. Brandlhuber. But the system's capabilities go beyond a mere assessment. For example, forward rates of banks can be set in relation to the company's own algorithmic market estimates and conclusions. In concrete terms, this means that even the advantage of a purchase date for hedging can be assessed. In this way, the AI technology can not only include current developments in the basis for decision-making, but also contribute to the company's own hedging strategy in the medium and long term. Financial market risks can be hedged, and possible losses can be avoided in the long term.
21strategies' AI technology is already in use
21strategies' AI technology is already being used by selected German companies from both the large cap and the mid cap market. For some companies, however, artificial intelligence still seems like a black box. But according to CTO Dr. Christian Brandlhuber, this is not necessarily the case. It is known which available and required information flows into the calculations. The AI technology tracks certain factors that have an influence on the exchange rate and thus on hedging. The current interest rate development, inflation rates and GDP growth are considered. In addition, geopolitical measures such as tariffs and sanctions are included in the determination of the optimal hedge. This creates a funnel, notes Dr. Brandlhuber. Based on this information, the AI technology determines the optimal hedge. The information and hedging recommendations can thus be presented in a comprehensible way, as well as assessed through a legal trace which records the AI's reasoning process. Thus, 21strategies' AI technology provides an innovative way to optimally hedge financial market risks and deliver algorithmic decision support for CTOs and treasurers.
This article is an update of an earlier article published in "Der Treasurer" under "Treasurer zeigen Interesse an KI-basiertem Hedging" on 04 March 2020 in German language.