Currency Cross hedge (Always Local vs X?)

CFA Level III
#1

I understand cross hedge as Local curency vs a currency similar to home currency, but can it be between a currency similar to the local currency, and a currency similar to the domestic currency? i.e. 2 completely different currencies? A proxy hedge is always Domestic vs similar (e.g. Yen instead of Remimbi)? Thanks

#2

I am fairly confident I remember reading that you can have two completely separate currencies. anyone 2nd this?

#3

A cross hedge is where you agree to pay the foreign currency to receive the third currency. A proxy hedge is the local and a different foreign currency.

#4

By Local I mean the foreign currency. Domestic is the home currency. Metsaregr8 we’re on the same page - I’m just keen to establish if there’s a slightly wider definition to cross hedge.

#5

So if you had a GBP local portfolio and you were a USD domestic fund manager. A cross hedge would be to: Sell GBP and buy EUR, then to sell EUR and buy USD. A proxy hedge would be to sell EUR and buy USD. Is that right?

#6

Cross hedge you are transferring the currency risk for where you are invested into another currency all together. A Proxy hedge you are hedging your investment in a foreign market with a currency that is highly correlated with it because of lack of liquidity in the 1st market.

#7

Cool. So we know: 1. Proxy hedge is domestic vs. other 2. Cross hedge is local vs other Is there a 3. Cross hedge is also other vs. other?