I am wondering why the answer to this should not be C. I feel C is more valid than B.
Currency risk can be minimized diversifying across markets, not eliminated.
But C says that “correlations between equity and currency markets are so low that overall currency risk is minimal” - which is not true for all markets. I feel C is also a problem.
B is the worst answer.
So Paraguay - do you feel C could be an answer - not sure if I got you?
Seems pretty straight forward to me. You CANNOT eliminate currency risk via diversification - you must use forwards for that. Thus, the fact that he says you can ELIMINATE currency risk via diversification is blatantly wrong.
But is it not blatantly wrong to assume that “correlations between equity and currency markets are so low that overall currency risk is minimal”?
manishsd Wrote: ------------------------------------------------------- > But is it not blatantly wrong to assume that > “correlations between equity and currency markets > are so low that overall currency risk is minimal”? Not really, have you traded EU/US/JPY risk convergence in the last 3 years?
Nope - sorry!!
manishsd Wrote: ------------------------------------------------------- > Nope - sorry!! Developed market equities have had a very high inverse correlation. Long term this has held well. Developing have positive correlation between equities and currency.
Okay - so the answer is B - cool!!