Bill Bender is a currency trader for International Investing Inc. Internationals portfolio managers specialize in finding attractive international investments for U.S. investors. Bender reviews these transactions and determines whether to hedge away some of the risk, then takes the appropriate hedging action. Tonight he will speak to several hundred students taking investment classes at a local college, discussing strategies for hedging currency risk. While eating lunch, he prepares the following talking points: - Options can be used to both directly and indirectly hedge currency risk. Futures can do the same.
- Direct hedging of the principal with futures allows investors to hedge away risk, but not to participate in any currency gains.
- A minimum-variance hedge is better than a simple hedge because it accounts for translation risk.
- To avoid basis risk, investors should make sure their futures contracts mature at the end of the asset holding period.
The analysts were busy this morning, and upon his return from lunch, Bender had a stack of proposed trades to review. The first transaction involves a series of long and short equity trades on a variety of foreign markets. While the trades generally wash out market risk, they make no allowance for currency fluctuations. The profit margin on such strategies can be low, so Bender must keep costs to a minimum. Bender creates a strategy to hedge away much of the risk. Another analyst wants to take long positions in a variety of European small-cap companies. While the analyst is confident that the stocks will deliver returns superior to other European small-caps, he is concerned that decreases in the euro will erode the returns for U.S. investors. The analyst has provided Bender with the following data: | 
发表于 2008-9-18 12:00
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