Monday, April 22, 2019
Currency Overlay Techniques and Perspectives Essay
Currency Overlay Techniques and Perspectives - Essay ExampleWhat are the advantages and disadvantages, or much specifically, the risks and rewards, of several common currency overlay schemes? In Mean/Variance Analysis of Currency Overlays by Philippe Jorion, three of the four most common strategies are discussed and analyzed. These are 1) joint, or building block, currency management, its goal to optimise or hedge the entirety of the underlying assets, be they stocks, bonds, or currencies themselves 2) partial optimization over the currencies, given up a pre-determined position in the core portfolio and 3) a separate optimization over currencies. In unit or joint hedging, it is assumed that the manager has expertise in many asset classes and can bodily structure a portfolio to account for correlations between assets and currencies, (Jorion, 1994). Partial optimization manages currencies separately from the core portfolio, but the manager close up controls total portfolio risk. Employing the method of separate optimization means to manage the currencies completely independently of the rest of the portfolio, even off going so far as to measure their performance against a separate benchmark or hire a separate currency overlay manager to deal with this part of the portfolio as unlike to the equity manager. In the unit hedging approach, the tools work together to maximize the performance in sparkle of the unique composition of the portfolio. Clearly, if done properly, this is the optimal approach.