What is the best framework for currency management?
There is widespread disagreement amongst investors over the best approach to currency management. And yet this is an area that makes a huge contribution to portfolio returns.
We list below papers on currency management in three sections: firstly, those addressing a general framework for currency hedging; secondly, those examining emerging market currency management; and finally, papers which explore the risk factors which arguably drive currency returns.
Currency Hedging and Management Framework
Getting a Grip on FX: Insights on currency hedging and risk (BlackRock)
This report explores how to identify and manage FX risks, and how currency exposures impact portfolio volatility. It discusses whether currencies should be hedged over the medium to long term, and whether EM currencies should be treated differently.
What is the appropriate level of currency hedging? (LGIM, 2017)
Authors from LGIM discuss how to determine the optimum level of currency hedging for investors in overseas assets.
Managing Currency Risk in a Two-Speed World (bfinance, 2017)
This bfinance paper discusses active currency overlays, FX transaction costs, and selection of currency managers.
Plugging the Leakages in Currency Hedging Implementation (Deloitte, 2017)
Should FX exposures be hedged, and if so how, and to what extent? This article by Deloitte helps investors make sense of these important issues.
The Portfolio Currency Hedging Decision (Vanguard, 2018)
This new research paper presents a currency hedging framework that places foreign exchange exposure in a multi-asset portfolio context, linking the hedging decision to the wider asset allocation decision.
Central Bank Foreign Currency Reserves Management (Invesco, 2017)
Invesco explores the options open to central banks, managing large foreign currency positions.
A New Look at Currency Investing - CFA Institute Research Foundation (2012)
The authors examine the rationale for investing in currency.
Emerging Market Currencies and EM Debt
Casting the widest net in emerging-markets debt (Eaton Vance, 2018)
Eaton Vance examines the best ways to invest in emerging market currencies and debt.
EM Local Debt: Focused on Fundamentals (Barings, 2018)
Barings' reveals the innder workings of their investment process and framework for investing in emerging markets local debt.
EM Debt: Think Local Currency in 2018 (PineBridge)
PineBridge examines the outlook for emerging market debt and currencies in 2018.
Will the Renminbi Surprise the Market Again in 2018? (BNP Paribas AM)
The renminbi started the year on a firm footing. What lies in store for the Chinese currency for the rest of 2018?
Currency Risk Factors and Return Drivers
The Magnitude, Causes, and Duration of Currency Carry Unwinds (FAJ, 2017)
This 24-page FAJ paper examines the causes behind the most dramatic episodes of currency carry loss from recent years.
The Missing Risk Premium in Exchange Rates (2016)
The authors present their findings that the real exchange rate (not interest rate differentials) is the main driver of FX returns over the long term.
Common Risk Factors in Currency Markets (NBER, 2015)
NBER authors examine the cross-sectional variation in excess currency returns.
Currency Momentum Strategies (2011)
The authors examine and report upon the efficacy of currency momentum strategies.
The Forward Premium Bias, Carry Trade and Risks of Volatility and Liquidity
The paper, examines FX phenomenon commonly referred to as the carry trade and the forward premium bias, helping investors to unpick the puzzle.
The Currency Carry Trade: Is It Still Viable?
The FX carry trade favours investment in currencies with higher interest rates, over those with low interest rates. This paper examines whether the strategy actually works.
Currency valuation and risk premia (2016)
How should currency valuation levels be assessed? This brief article suggests a new way.