This study explores optimal currency exposures in international equity portfolios through
the lens of a modified mean–variance optimization framework. We decomposed the
optimal currency portfolio into a “hedge portfolio” that uses a dynamic risk
model to minimize equity volatility and an “alpha-seeking portfolio” based on
the well-documented currency styles of value, momentum, fundamental momentum, and carry.
This method is an integrated and economically intuitive approach to currency management
that simultaneously provides lower risk and higher returns than either hedged or unhedged
benchmarks. Crucially, the solution is practical, with realistic and implementable
leverage, turnover, and tail-risk characteristics.
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Financial Analysts Journal
CFA Institute Member Content
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