R17-Currency Management

Curriculum (Pg 359) says that there is a tendency for investors to shift investments into the perceived safety of reserve currencies, in times of stress. Hence keeping some exposure to the US dollar in a global bond portfolio would be beneficial.
Point understood. However,
For non-US investors, this would mean under-hedging the currency exposure to the USD (i.e., a hedge ratio less than 100%), whereas for US investors it would mean over-hedging their foreign-currency exposures back into the USD.

I dont understand why underhedge or overhedge…

Magician, pls help…

For non-US investors investing in any nation but the US would make it a sensible hedge. For instance investing in an EM currency.

For US investors investing elsewhere would mean they are short the dollar (recall the domestic currency return formula). And so to hedge that, US investors would go long the dollar.

Thanks Saurabh…

Understood your second point…
But not the first…why would any other nation but the US make a sensible hedge?

What I meant to say was for a non-US investor investing say in EMs, going long the dollar then would make a sensible hedge for that investor.

Sorry to have confused you. Didn’t frame it properly.

Since you specifically asked for the magician…:grinning:

Was kinda expecting you to show up at the first light, on the fifth day. :stuck_out_tongue:

Yup… was out in the deep of the Mirkwood forest last few days. Concocted the potion. While on my way back to Rhosgobel got robbed by the scientists of Astra Zeneca…:wink: