LEADER
GLYHUVLÀHU RU UHPRYHG WR DYRLG XQZDQWHG YRODWLOLW\ In many cases, investors deem currencies to generate a “zero return” over the long term, arguing that SDVVLYH KHGJLQJ UHVXOWV LQ XQFRPSHQVDWHG FRVWV But even if currency risk produces no return value, it does change the overall risk characteristic of many portfolios and so plays an important role in GHWHUPLQLQJ ÀQDQFLDO RXWFRPHV 0RUHRYHU HYHQ LI WKH YLHZ WKDW FXUUHQF\ UHWXUQV ´ZDVK RXWµ ZHUH to be true, the statement implies that investors are LQGLIIHUHQW WR LQWHULP YRODWLOLW\ %XW LQWHULP YRODWLOLW\ can be critical, given that most institutional investors DUH IDFHG ZLWK VKRUWHU WHUP OLDELOLWLHV RU UHWXUQ KXUGOHV
F
0DQ\ LQYHVWRUV DVVHVV ULVN using traditional methodologies such as Value at Risk (VaR); measuring the OLNHOLKRRG RI XQGHU SHUIRUPLQJ D SUH VSHFLÀHG GRZQVLGH threshold at the end of a particular LQYHVWPHQW KRUL]RQ This measurement LV ÁDZHG LQ D PDQQHU similar to that of the argument WKDW FXUUHQFLHV ZDVK RXW LQ WKDW LW IRFXVHV H[FOXVLYHO\ RQ ZKDW PLJKW KDSSHQ at the end of an investment horizon, ignoring WKH SDWKV WKH SRUWIROLR PLJKW WDNH DORQJ WKH ZD\ 0DQDJLQJ LQWHULP ULVN WKURXJKRXW WKH OLIH RI WKH SRUWIROLR FDQ EH HVVHQWLDO WR ORQJ WHUP VXFFHVV
An alternative measure of risk is Within Horizon 9DOXH DW 5LVN ZKLFK PHDVXUHV WKH OLNHOLKRRG WKDW DQ LQYHVWPHQW ZLOO GHSUHFLDWH WR D VSHFLÀHG OHYHO DW DQ\ JLYHQ SRLQW ZLWKLQ D VSHFLÀHG KRUL]RQ EH LW D ZHHN D PRQWK RU D \HDU 1
ORZHU WKDQ :LWKLQ +RUL]RQ 9D5 WKH ULVN RI ORVV LV FRQVLGHUDEO\ KLJKHU ZLWKLQ DQ LQYHVWPHQW SHULRG DV FRPSDUHG ZLWK LWV FRQFOXVLRQ :KLOH WKLV PD\ suggest good prospects for recovery before the end of the horizon, it only applies to those investors IRUWXQDWH HQRXJK WR VXUYLYH LQWHULP YRODWLOLW\
Interim risk is only acceptable to a prudent investor should they feel that they are being adequately FRPSHQVDWHG IRU WDNLQJ WKDW ULVN +RZHYHU DV
or many institutional investors, currency risk is simply a byproduct of other investment decisions and may be retained as a portfolio
advocates against hedging suggest that currency UHWXUQV ¶ZDVK RXW· LQ WKH ORQJ UXQ WKHUH VHHPV WR EH ZLOOLQJQHVV RQ WKH SDUW RI VRPH WR EHDU WKH uncompensated risk that accompanies unmanaged FXUUHQF\ H[SRVXUH 7KLV LV QRW WR VD\ WKDW DOO portfolios should be hedged, but that currency hedging should be a deliberate decision taking into consideratioQ D QXPEHU RI IDFWRUV
Determining the optimal
Passive Hedging policy $OWKRXJK KHGJLQJ VWUDWHJLHV RIIHU D KLJKO\ ÁH[LEOH continuum of posVLEOH WHFKQLTXHV DVVHW RZQHUV often begin their consideration of currency strategies ZLWK DQ DLP WR TXDQWLI\ FXUUHQF\ ULVN WR SRUWIROLRV and identify optimal strategic hedge ratios to minimize portfolio volatility (absolute or UHODWLYH WR OLDELOLWLHV DQG RU EHQFKPDUNV 7KLV optimal hedging policy can be GHÀQHG DV D VLPSOH uniform hedge ratio that evaluates D SRUWIROLR·V
currency exposure LQ WKH DJJUHJDWH
Alternatively, the policy can be more complex, for example
LGHQWLI\LQJ D VHW RI FXUUHQF\ VSHFLÀF KHGJH UDWLRV WKDW MRLQWO\ PLQLPL]H ULVN 7UDGLWLRQDO 9D5 LV DOZD\V
To identify the passive hedging policy, institutional LQYHVWRUV WRJHWKHU ZLWK WKHLU FRQVXOWDQWV DQG currency managers, should take into consideration the base currency of the portfolio, asset mix and VSHFLÀF FRXQWU\ H[SRVXUHV 7KH RSWLPDO SDVVLYH currency hedging program should seek to neutralize XQFRPSHQVDWHG ULVN IUHHLQJ PDQDJHUV· ULVN EXGJHWV for a more deliberate allocation to those asset classes ZKHUH WKH\ EHOLHYH WKH\ FDQ LGHQWLI\ VNLOOHG PDQDJHUV for return enhancement (often including active curUHQF\ PDQDJHUV
Currency Management 0DUN .ULW]PDQ DQG 'RQ 5LFK ´7KH 0LV PHDVXUHPHQW RI 5LVN µ )LQDQFLDO $QDO\VWV -RXUQDO 0D\ -XQH Autumn 2011 | Currency Investor 13
program implementation The currency management industry has seen a marked increase in the number of participants in UHFHQW \HDUV 0DQ\ RI WKH ZRUOG·V ODUJHVW LQYHVWPHQW
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92