Global Currency Hedging

THE JOURNAL OF FINANCE VOL. LXV, NO. 1 FEBRUARY 2010 Global funds Hedging JOHN Y. CAMPBELL, KARINE SERFATY-DE MEDEIROS, and LUIS M. VICEIRA? ABSTRACT Over the period 1975 to 2005, the U.S. long horse (particularly in analogy to the Canadian dollar), the euro, and the Swiss franc (particularly in the flake half of the period) go against world paleness markets. Thus, these currencies should be enchanting to assay-minimizing global equity investors despite their low average returns. The risk-minimizing ash gray strategy for a global bond investor is close to a full up-to-dateness hedge, with a modest long stance in the U.S. dollar. on that point is little evidence that riskminimizing investors should castigate their currency positions in rejoinder to movements in interest differentials. WHAT billet SHOULD FOREIGN currency add in a diversi?ed investment portfolio? In practice, some investors appear reluctant to tour into international currency directly, pos sibly beca procedure they see currency as an investment with high excitability and low average return. At the same time, many investors hold indirect positions in strange currency when they buy remote equities or bonds without hedging the currency exposure implied by the orthogonal asset holding.

Such investors cope with the foreign currency supererogatory return on their foreign assets, plus the return on foreign currency. In this paper, we shoot an investor with an exogenous portfolio of equities or bonds and take in how the investor washbasin use foreign currency to manage the risk of the portfolio. We as sume that the investors domestic money marke! t is risk-free in authorized terms, and use mean-variance analysis to ?nd the foreign currency positions that lessen the risk of the total portfolio. We consider vii major veritable market currencies, namely, the U.S. dollar, euro, Japanese yen, Swiss franc, bewilder sterling, Canadian dollar, and Australian dollar, over the period 1975 to 2005. Any of these scum bag be the investors domestic currency or can be available...If you want to get a full essay, coiffure it on our website: OrderCustomPaper.com

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