Global Currency Hedging

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

Such investors earn the foreign currency supererogatory return on their foreign assets, plus the return on foreign currency. In this paper, we experience 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 assume that the investors domestic money market is risk-free in real! number terms, and use mean-variance analysis to ?nd the foreign currency positions that smear the risk of the total portfolio. We consider vii major essential 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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