Keep seeing this pop up on this forum. Can someone help me witht his? I don’t recall this, I have read the entire CFAI curriculum and done EOCs twice. Where the heck is this?
are you asking what each is about (a definition)?
I’m asking why high beta stocks could be used in a portfolio to lessen currency exposure…
i have never seen/heard that
me either. Only thing I can think of is that in developed markets’ currency and stock markets tend not to be correlated .
I have seen this. Suppose you want an exposure of $1mil to Japanese index for 3 months. At the end you are exposed to currency transaction risk on capital $1mil and the return. To reduce the transaction risk:
Use derivatives. Go long on futures and settle on cash at the expiration. You are only exposed to transaction risk on the return on the index.
You can invest in a Japanese portfolio with beta 4, that means you need only to invest $0.25mil for the same exposure of beta 1 with $1mil. You are now only exposed to transaction risk on $0.25mil and return.
interesting. thank you
^ makes sense