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Currency overlay for global equity portfolios : cross-hedging and base currency
journal contributionposted on 2015-02-01, 00:00 authored by Wei OpieWei Opie, J Dark
The effectiveness of a currency overlay hedge for a global equity portfolio can be significantly affected by changes in the base currency. Base currency changes have no significant effect on the hedged portfolio risk; however, they may substantially increase or decrease risk relative to the unhedged position. Australian (AUD) and Canadian (CAD) forwards provide effective cross-hedging, particularly in combination with one or two other currency hedges. Hedge effectiveness is significantly improved by allowing for natural hedges via a dynamic approach that captures structural change and permits under-hedging of currency exposures. © 2014 Wiley Periodicals, Inc.