From proof of concept to The Currency Exchange Fund
To prevent currency risk from being offloaded to those who can bear it the least, FMO, the Dutch entrepreneurial development bank, experimented with a fund that provided loans in local currency. Subsequently, Cardano Risk Management B.V. conducted a retrospective analysis on a hypothetical emerging market currency portfolio.
It confirmed FMO’s experience that a local currency portfolio can generate a small positive return as it is so well diversified that it can absorb large losses in case of a currency crisis as long as it has sufficient capital buffers.
These experiences led to the establishment of TCX in 2007. The Fund pioneers local currency financing in most frontier markets, where no affordable hedging products or benchmarks are available. As such, TCX is increasing the financial resilience of local businesses and households but is also supporting the development of the local financial sector. The Fund’s work in Azerbaijan illustrates the positive impact of local currency financing.