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Currency Hedging – Proof of Concept - Sample Use Case for a FX Portfolio

posted Jan 3, 2019, 9:55 AM by Felix Fernandez

"We have no control over outcomes, but we can control the process. Of course, outcomes matter, but by focusing our attention on process, we maximize our chances of good outcomes. “

Michael J. Mauboussin


-      With a global scope of investment activities, the involved currency risks for larger portfolios can be substantial and have to be managed properly.

-      Typical approaches are either not to hedge at all or to hedge the existing currency exposure to certain extent statically (e.g. 50% or even 100%), which may lead to significant costs for long term commitments.

-      In addition to the costs of long-term static hedging, which of course protects against losses triggered by the external currency, it also hinders to participate in favorable currency moves.

-      The aim of this proof of concept is to assess the potential of a dynamic hedging approach by applying advanced statistical methods to the exchange rates of several currency pairs.

-      Based on the measured currency stability, the hedge ratios are adjusted on a rolling, monthly basis.

-      All simulations are calculated out-of-sample to ensure the highest accuracy in the expected results.

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Felix Fernandez,
Jan 3, 2019, 9:55 AM
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