A question about collinearity in joint optimization, when hedging multiple currencies
In currency management, how to hedge multiple currencies, the practical implication of Minimum-variance hedge ratio is joint optimization.
Rdc = f(Rfc, Rfx), in which Rfc refers to foreign stocks, Rfx refers to foreign currency. It is said by multiple regression like this function, the correlation between these two variables (Rfc and Rfx) could be considered as well.
Will there be multicollinearity in this regression, which on the contrary decrease, not increase the accuracy of regression? Thanks.
Study together. Pass together.
Join the world's largest online community of CFA, CAIA and FRM candidates.