I am facing a situation at work – need your advice. Basically, I’ve invested in a foreign country and the foreign currency (not the domestic currency return) of that country seems to be positively co-related with the stock returns. Want to know whether I should use a minimum variance hedge? Your thoughts will be much appreciated
I don’t think here could be the only one right solution. That’s up to your investment strategy - if you are very risk tolerant and additionally to price risk want to take currency risk - never do hedge! 
My personal experience says to take exposure to those risks, where you are an expert and can add value. Otherwise - hedge and forget about.
With, what is I’m assuming to be, a low correlation between the changes in the local currency asset returns and exchange rate, you wouldn’t need to hedge the economic risk, only the principal. I remember a problem similar to this in a Finance 101 course I once took at the University of Phoenix. I wasn’t exactly sure at the time if minimum variance hedge referred to only the economic risk or transaction risk as well; it refers to the sum of the transaction and economic risk.
That same semester at the UOP I took a course in the study and interpretation of ancient manuscripts and the professor was a real nutter for discussing proper construction of portfolio benchmarks. There was this particular issue referenced from Reuters about a portfolio that was under weighted in a particular segment and how adding exposure to an index fund would affect the risk/return level… at the time I thought such an action would increase the active risk of the portfolio but I can’t remember if that was correct.
eikichionizuka Wrote: ------------------------------------------------------- > That same semester at the UOP I took a course in > the study and interpretation of ancient > manuscripts and the professor was a real nutter > for discussing proper construction of portfolio > benchmarks. There was this particular issue > referenced from Reuters about a portfolio that was > under weighted in a particular segment and how > adding exposure to an index fund would affect the > risk/return level… at the time I thought such > an action would increase the active risk of the > portfolio but I can’t remember if that was > correct. I would think it would decrease the misfit return.
That was my initial thought and yea… that sounds about right… given the portfolio was experiencing increased returns from the underweight