Identify 1 similarity and 1 difference between a hedge of the principle and a minimum variance hedge (2 points):
Similarity - they both try to protect the investor against adverse currency movements Difference - the principal hedge strategy is concerned with the change in value at a future POINT in time , while a minimum variance hedge is concerned with changes in value DURING a period. Also pricipal hedge does not hedge the changes in value, and does not need rebalancing
Similarity - they both try to protect the investor against adverse currency movements Difference - the principal hedge strategy tries to hedge the principal value against adverse movement only related to translation risk. The minimum variance hedge accounts for the interaction between local currency movements and asset returns. This means the MVH accounts for transaction risk (called translation risk on schweser reading) and economic risk.