Choice of Currency Exposures
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My question is: foreign bond return should be negative correlated with foreign currency movement relative to domestic currency. So, there is no need for currency hedging for bond portfolio. Why the above statement says currency risk should be hedged? Let’s say a Canadian investor hold US bond. As US interest rate increases, US bond price falls. US bond portfolio experiences loss. But USD appreciates relative CAD because of carry trade. That is a positive impact for US bond portfolio. So, currency exposures should provide diversification benefit to fixed-income portfolios. Why the above statement is the opposite?
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