FX Risk
Definition
FX risk, also known as foreign exchange risk or currency risk, refers to the potential financial loss that an investment fund may incur due to fluctuations in exchange rates between different currencies.
Impact on Usual’s collateral
If we hold non-USD denominated investments , changes in exchange rates can significantly impact USD0’s collateral. These fluctuations can occur due to various factors such as economic indicators, geopolitical events, interest rate differentials, and investor sentiment.
Risk Monitoring and Management
First Line of Mitigation:
FX Risk Tolerance: We have zero tolerance for FX risk and only accept Real World Assets (RWAs) that exclusively invest in USD assets or are 100% FX hedged. As a result, Usual effectively mitigates direct FX risk exposure.
Second Line of Mitigation:
Asset Selection and Management Oversight: Typically, we select tokenized RWA assets with strict limitations on holding non-USD denominated assets. The tokenizer asset management team responsible for overseeing these RWA assets serves as the initial line of defense, ensuring strict compliance with our FX policies.
Third Line of Mitigation:
Enhanced Regular Monitoring: In addition to the independent monitoring conducted by the tokenizer team, we perform our own regular reviews of the holdings of our RWAs. This dual-layer monitoring process is crucial for verifying strict adherence to our no-FX risk policy.
Non Compliance Management:
Initial Response to Deviations: In the event of a deviation from our FX policy, we will promptly communicate with the tokenizer asset management team to identify and address any discrepancies, collaborating closely to rectify the situation.
Escalation of Persistent Deviations: If the deviation persists despite initial corrective measures, we will escalate the issue by engaging with protocol governance to determine the appropriate course of action. This may involve removing an RWA from the list of eligible collateral or reducing our exposure to further mitigate risks.