Can currency risk be eliminated?
if transaction exposure yes , risk shifts into credit structures. if economic exposure not quite if translation exposure , don’t bother, nobody does it
Not necessarily- if you own a Japanese stock, you can’t fully hedge the JPY exposure as you don’t know the future value of the stock. You can only do it if you hedge the market risk of the stock first, so that you have a guaranteed payout in the future. Bit of a vague question really.
if you own a Japanese stock you have economic exposure ( to Japanese economy , if mainly local customers etc) – cannot hedge with certainty If you own a payment due or have to make a payment to a foreign supplier , you have transaction exposure – can hedge with certainty
There was a question which asked something like “Currency risk is difficult to eliminate” T/F? I put true because you can’t eliminate it, but can reduce the exposure (i.e. hedge).
Jana- agreed. I only focussed on economic exposure. Eazy- that is a dumb question if nothing else is given. I guess I’d answer true, but I doubt CFA would be that stupid with their questions
I think this was a Sample I question , and fooled me too. The emphasis was on difficult , not on eliminate. It is not difficult as you have a variety of options ranging from options,futures,forwards, OTC swaps etc. They did not even address the “eliminate” part and I was fuming
currency risk can be eliminated by derivatives
Probably depends on the type of derivative hedge too, but I think not fully if economic exposure ( e.g. cost of hedging with derivatives versus realized value of the hedge )
Well then a following question is… Does correlation btn Emerging Markets and Developed Country increase in time of volatility? PS - and isn’t translation risk *reduced* by hedging the principal? o-O
Eazy E Wrote: ------------------------------------------------------- > Can currency risk be eliminated? Straight outta Compton
is your question that correlation between EM Returns and EM currencies higher during volatile times than developed countries returns/currencies ? – answer is YES Developed markets may have even negative correlation being export oriented and inter-dependent. EM is always +ve correlated I personally think this is b.s. but that is the 10 year old CFA curriculum
Eazy E Wrote: ------------------------------------------------------- > Well then a following question is… > > Does correlation btn Emerging Markets and > Developed Country increase in time of volatility? > > PS - and isn’t translation risk hedged by hedging > the principal? o-O Correlation increases, but not necessarily because the economies start moving together- higher volatility causes higher correlation= faulty econometrics. However some claim that contagion does happen sometimes, so the answer is a definite ‘maybe/sometimes’ Edit- Just noticed it was between developed and emerging. I think developed can affect emerging, but emerging will not affect developed. I really can’t remember the specifics though
no no it’s whether the correlation in risk and returns between developing and EM will increase. Schweser says it does, but then says statistical abbrevation indicates it actually doesn’t. In the exam…which one should we put.
back to currency risk elimination i think i can definitely eliminate the currency risk of a buy-n-hold bond. i know all my coupons, i got all my forward rates: my domestic return will still be DIFFERENT from the return in LC units, but the RISK (i.e. variance) will be eliminated, if all my coupon and principal payments are hedged w. forwards.
No, but it can be reduced.
if bond market, you can definitely eliminate… but if stock market you cannot eliminate because there is an “economic exposure” which is the part that increase or decrease value from the stocks…
Straight outta Compton, is a brotha that’ll smother yo mother, and make ya sister think I love her