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

Valores

ok great now please explain it to me

lcai

ok done. Don't Hedge when you expect to beat the market.

Iginla2011

Hedge it only if r(dc)-r(fc) is higher.



Edited 1 time(s). Last edit at Friday, May 6, 2011 at 10:03AM by deriv108.

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!

Darien

kylee Wrote:
-------------------------------------------------------
> 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


If IRP < manager forecasted appreciation, then why should we hedge??

NO EXCUSES

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

bkballa

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