WOCU finds voice in Mid West
New Tool to Hedge Currency Risk
Investors don’t have to be told that the price of one asset, whether it is stocks, commodities or currency, is more volatile than a market basket of assets. After all, that’s the theory behind mutual funds and portfolios. Until now, however, dollar-index futures and options were limited to just six currencies against the dollar – all developed countries and not necessarily where investors and companies are doing business today.
The WOCU, or World Currency Unit, is a new trading index that allows hedging – or it can be used in place of sovereign currencies. When a buyer and seller are in two different countries, they no longer will have to agree on which currency the deal will be priced by.
The WOCU includes the countries with the top 20 gross domestic products (GDP) as reported by the International Monetary Fund (IMF). The weights given to each currency are changed as GDP changes, so countries may be added or dropped from the top 20 and the weighting of the remaining countries adjusted. The U.S. dollar is one of the currencies in the basket, so American investors are not trading against it.
“We believe that because the WOCU basket includes the so-called BRIC countries [Brazil, Russia, India and China], which are increasing in importance in world trade, the WOCU index will mature to become the de facto index”, says Andy Slater, director of sales for WDX Organisation Ltd., the owner and distributor of the real-time WOCU price quotation. “It is widely held that by 2027, China’s GDP will outstrip that of the U.S. The Wocu basket will reflect that and the growing importance of the Asian zone.”
Because the value of some currencies are rising while others are falling, the volatility in the value of the WOCU is less than that of currency. In fact, a study based on 2000 through 2009 values found that if crude oil had been traded via the Wocu, rather than with straightforward currency conversion, there would have been an average 10% savings in volatility. “This applies to corn, soybeans and other commodities, as well,” Slater says. “This can have a tremendous impact on the bottom line.”
The WOCU is to be listed on the Polish Futures Market in Warsaw, and WDX is in discussion with other exchanges, the leading investment banks worldwide and IMF. “It will take time to gain traction, but some over-the-counter transactions are under way and we are confident the WOCU’s risk-management value will carry it forward,” Slater says.
Linda H. Smith, Market Outlook, Farm Journal Magazine.