DSquaredSlim

OK, currency hedging will take care of the FX risk, but in terms of managing your duration risk with respect to the change in the U.S. rates, shouldn't there be an adjustment made to the raw duration of the foreign bonds? Say you invest in 10 year Russian zero coupon bond (duration = 10 years), denominated in Russian rubles, and 10 year UST yields go up by 50 bps, your regular duration measure will tell you that your bond will loose ~5% in value, but in reality the pricew of this bond depends mainly on the change in Russian yield curve. So if the Russian yields have, say, +0.7 correlation with the U.S. yields (this is just a made up number, for illustration purpose only), then your bond is actually going to loose 3.5% only. This is the kind of asjustment I am talking about.

malbec

Ok. Normally, you would measure duration (US rate sensitivity) and FX deltas separately, particularly since you can hedge these two things independently. As a parallel example, imagine you are pricing some other security like a call option. Call options have rates sensitivity, but you would never include this in the same risk measure as other risk components: delta, vega, etc.

maratikus

Just hedge the principal and interest payments back into USD and calculate the duration based on that.

economicz

i guess the question is why are you trying to incorporate the effects of fx in your duration number............seems to be mixinig two concepts into one...............duration analysis and Break even analysis.............

bodhisattva

My definition of "duration" for non-US bonds is the change in the non-USD bond's value in response to 1% change in the U.S. yields. Yes, I am calculating the payoff (returns) in USD, and given that the change in the U.S. rates are not perfectly correlated with the changes in foreign rates (these, in fact, will also be influenced by the FX rates - interest rate parity), I am assuming that I will need to adjust each non-USD bond duration by a factor, which will show the correlation between the U.S. yield curve and non-U.S. curve in question...?

ohai

What is your definition of "duration" for non-US bonds? Also, are you calculating the payoff in USD? Otherwise, it doesn't seem like you will need FX.