Bridge over ocean
1 January 1994 Financial Analysts Journal Volume 50, Issue 1

Modeling Currency Hedges in a Mean/Variance Framework

  1. Laurent Cantaluppi
Currency hedges can lower the risk of an internationally diversified portfolio without changing its expected return. Often, however, hedges are not optimized simultaneously with the assets, or they are implemented indirectly by splitting each foreign asset into two fictitious assets, one representing the original asset in its local currency and one representing it in a base currency. A better approach is to implement currency hedges as separate pseudo-assets having their own weights, returns, risks and correlations.
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