Naive vs Minimum Variance Hedge Sub components of Variance decomposition
Wat
seriously WHAT?
Naive hedge - only hedging currency risk of the principal amount and not change in principal Minimum variance hedging - Hedging both Sub components Transaction component - hedging currency risk of principal Economic component - heding currency risk of total portfolio return
drk Wrote: ------------------------------------------------------- > Naive hedge - only hedging currency risk of the > principal amount and not change in principal > > Minimum variance hedging - Hedging both > > Sub components > > Transaction component - hedging currency risk of > principal > Economic component - heding currency risk of total > portfolio return Fo shizzle
Agree with meaning of naive hedge above Minimum variance hedge is the hedge required based on correlations of the stock returns and the currency returns = 1 + (Cov (stock returns, currency returns)/ squared standard deviation of currency returns)