Hedging for currency risk foreign, between, currency, investing, difference

DoubleDip

Hi,

I would like to know whether we should hedge currency risk when (1) investing in international equity (2) investing in international bonds?

The answers are no hedging for equity & hedging for international bonds. As there are substantial differences between US / foreign bond market return correlations for hedged & unhedged returns.

Please suggest reasons for the difference in hedged & unhedged bond returns.

Many thanks,

Lee

oneboy

bpdulog , did you mean , expectation of less DEPRECIATION than the market expects?

Because if both you and the market expect APPRECIATION , why would you hedge at all , in the context of a long position in foreign stocks/bonds?

Please help to clarify when you would hedge an expected appreciation of the local currency versus the domestic

bkballa

even if you expect appreciation, you could still get a bigger gain by hedging, depending on the forward rates.

Colum

This has been driving me mad. bpdulog, can you explain the second part of your statement. I get the first part where if you think foreign will appreciate more than IRP suggests, you don't hedge.

But for second statement, if you think IRP depreciates more than what you expect, than you hedge? Is that right? I thought you wouldn't hedge since hedging would mean you get IRP?


Sorry if I caused any confusion. Just want to know if this statement applies to both appreciation and depreciation case:

ONLY HEDGE IF YOU THINK YOU CAN'T BEAT THE MARKET?

(so if IRP > your expectations, hedge).

Is this correct?

NakedPuts2011

just calculate both the hedged and unhedged return, and pick which one is bigger

canadiananalyst

1. You expect foreign to appreciate more than market expects. Hedge or no hedge?
2. You expect foreign to depreciate less than market expects. Hedge or no hedge?

I thought both would be to not hedge. Is this wrong?



Edited 2 time(s). Last edit at Thursday, May 5, 2011 at 09:18AM by mp2438.

strikethree

mp2438 Wrote:
-------------------------------------------------------
> wake, a man of few words.


multitasking rocks shun.

Analyze_This

mp2438 Wrote:
-------------------------------------------------------
> 1. You expect foreign to appreciate more than
> market expects. Hedge or no hedge?
> 2. You expect foreign to depreciate less than
> market expects. Hedge or no hedge?
>
> I thought both would be to not hedge. Is this
> wrong?

Doesn't it all depend on whether you are receiving money or paying money?

Roflnadal

Hi,

For the general hedging,

If the anticipated appreciation (from IPP calculation) < Mgt's forecast : hedge (to get the extra profit).
If the anticipated appreciation (from IPP calculation) > Mgt's forecast : no hedge.

If the anticipated depreciation (from IPP calculation) > Mgt's forecast : hedge (otherwise loss will be more than expected).
If the anticipated depreciation (from IPP calculation) < Mgt's forecast : no hedge.


But my question is why we need to hedge currency risk for bond but not for equity?
The reason for not hedging equity are:
(1) currency risk & mkt risk arte not additive
(2) currency risk can be eliminated by derivative.
(3) currency risk is insignificant & will revert to fundamental in long term.

But I can't find proper reason for the hedging of bond return.
The answer just said " hedge as significant difference between hedged & unhedged bond return." I think this is the result of not hedging and want to know the reasons.

Please suggest reasons for the difference in hedged & unhedged bond returns


Many thanks,

Lee

former

Equity investment is generally risky and gaining exposure to the foreign currency, though will not reduce volatility except if they are negatively correlated but as you rightly said, is not additive. If you want to gain exposure to equity, you are ready to take risk, then why not go all the way and leave equity investment unhedged?

Bond investment are less volatile than foreign currency movements. Investors will only buy bond in a foreign market if the yields are high enough and will therefore hedge the foreign currency exposure in order to enjoy the higher yields. This is where breakeven analysis comes into play... I love CFA!