Formulating a Client-Appropriate Currency Management Program

Generally speaking, the strategic currency positioning of the portfolio, as encoded in the IPS, should be biased toward a more-fully hedged currency management program the more volatile (i.e., risky) financial markets are.

Why? The asset value will fluctuate largely if the financial market is high volatile. Hence, more frequent rebalancing will be required to fully hedge the currency risk. The more frequent rebalancing, the higher trading cost. Hence, fully hedge should not appropriate if financial market is high volatile.

The more volatile the currency is though, the more you could stand to lose. If you held the belief that an EM currency could drop in value by 40% then believe me, you would lock in that hedge despite the likely cost associated with rebalancing.

Let me also ask you this, you would you rather hedge in a benign scenario where no change in the currency is likely?

The volatility of financial market is not the volatility of foreign asset?