The Currency Investing Process: Managing G10 Currencies

Ulf J Lindahl

The G10 currencies are the most actively traded currencies in the foreign exchange market, and are generally included in most currency investment portfolios in one way or another unless a currency strategy is dedicated to investing exclusively in EM or exotic currencies. The deep liquidity in the G10 currencies has permitted several specific investment styles to be developed that take advantage of features in the currency market that have proved to persist over long periods of time. This chapter will define the G10 currencies, and provide measures of their liquidity and correlation with each other. It will also describe common strategies that currency managers employ, how risk is managed and also look at performance measurements.

MARKET LIQUIDITY

The G10 currencies are the US dollar (USD), the euro (EUR), the Japanese yen (JPY), the UK pound sterling (GBP), the Swiss franc (CHF), the Norwegian krone (NOK), the Swedish krona (SEK), the Canadian dollar (CAD), the Australian dollar (AUD) and the New Zealand dollar (NZD). An investor who operates with one of the G10 currencies as their base currency and measures investment returns against it has a universe of nine currencies that can be bought and sold against the base currency, as well as the opportunity to initiate long and short positions in their cross-rates when the currency investment universe is restricted to the G10 currencies.

The Bank for International Settlements (BIS) has conducted surveys of the market activity in the global foreign exchange market since 1989. Its April 2013 Triennial Central Bank Survey determined that the daily global foreign exchange market turnover was USD5.345 trillion, up from a volume of USD3.971 trillion in 2010 and USD1.527 trillion in 1998, when the euro was introduced. The bulk of that daily turnover was in the G10 currencies.

The G10 currencies have consistently been the most traded and most liquid currencies since 1989. However, ranked by their percentage share of the daily turnover in April 2013 (as shown in Table 12.1), and in each of the triennial surveys conducted by BIS since 1989, the Swedish krona and the Norwegian krone have not been placed among the top 10. Latterly, the surveys have shown the Mexican peso and the Chinese yuan have had slightly larger trading volumes than the two Nordic currencies, despite them not being considered as G10 currencies.

 

Table 12.1 Trading volume in G10 currencies (April 2013)

Currency	Symbol	Rank	Share
US dollar	USD	1	87.0%
Euro	EUR	2	33.4%
Japanese yen	JPY	3	23.0%
UK pound	GBP	4	11.8%
Australian dollar	AUD	5	8.6%
Swiss franc	CHF	6	5.2%
Canadian dollar	CAD	7	4.6%
New Zealand dollar	NZD	10	2.0%
Swedish krona	SEK	11	1.8%
Norwegian krone	NOK	14	1.4%
Total			178.8%

Source: Adapted from BIS April 2013 Triennial Central Bank Survey
Note: The shares of daily trading volume, inclusive of all other currencies in the survey, add to 200% due to each trade involving two currencies

A currency is always bought or sold against another currency. As a result, the BIS counts both sides of a currency trade in its surveys. The total turnover in all currencies therefore adds to 200%. As shown in Table 12.1, the combined turnover in the G10 currencies was 178.8% out of the total of 200% in 2013, or close to 90% of the global trading volume.

The US dollar has dominated the daily turnover since most currencies are traded against it. The total for the dollar was 87.0% in 2013, which was a marginal increase over 86.8% in 1998. With the US dollar having been at the centre of the global currency trading regime for several decades, the dollar can be visualised as the sun and the other G10 currencies as planets revolving around it.

CORRELATIONS

Fundamental, economic, political and many other factors that constantly change determine the exchange rates of each G10 currency against the dollar and against each other. However, the central role of the US in the global economy, combined with the US dollar as the world’s reserve currency, has created strong correlations between the G10 currencies in their movements against the dollar. These correlations have implications for how the G10 currencies are managed since the correlations naturally place them into four groups, which reduce the G10 into the G5 in terms of risk. These groups are:

• the euro, Swiss franc, Norwegian krone and Swedish krona;

• UK pound;

• Japanese yen; and

• Canadian dollar, Australian dollar and New Zealand dollar.

The historical price trends in the G10 currencies against the US dollar are illustrated in Figures 12.1–12.4.

The correlations in price changes between the European currencies in group 1, particularly between the euro and the Swiss franc, and between the Norwegian krone and the Swedish krona, have been significant since 1998. The correlations have been 0.84 between the euro and the Swiss franc and 0.95 between the two Nordic currencies, based on monthly price data. The correlation between the Australian dollar and the New Zealand dollar has been even higher at 0.954, and been only slightly lower between the Australian dollar and the Canadian dollar at 0.953.

 

Figure 12.1 European currencies against US dollar

Note: Price data Reuters, Bloomberg and Citibank

 

Figure 12.2 UK pound against US dollar

Note: Price data Reuters, Bloomberg and Citibank

 

Figure 12.3 Japanese yen against US dollar

Note: Price data Reuters, Bloomberg and Citibank

 

Figure 12.4 Australian, New Zealand and Canadian dollars against US dollar

Note: Price data Reuters, Bloomberg and Citibank

Due to the high correlations, the intermediate-term price movements spanning a few months between the Norwegian and Swedish currencies, for example, have historically had significantly less amplitude than their price movements against the US dollar and against the other G10 currencies. The same is true for the intermediate-term price trends in the Canadian dollar, the Australian dollar and the New Zealand dollar against each other and against the US dollar. As a result, profit opportunities and the risk of suffering losses are normally larger when positions are initiated in these currencies against the US dollar than when they are initiated against each other.

The historical persistence of the correlations has meant that it has been difficult to reduce risk through diversification when trading and investing in the G10 currencies only; the universe of the nine available currencies that can be traded against an investor’s base currency has effectively been reduced to four currencies and their cross-rates. A currency portfolio that includes all G10 currencies is not as diversified in terms of market risk as it may appear to be on the surface.

FORECASTS

Companies involved in international trade, investors with global portfolios and other market participants who are impacted by constantly fluctuating currency exchange rates and the often very large price changes over longer periods of time of several years, need to know what future exchange rates might be. To fill that need, financial institutions, economists and currency strategists have generated volumes of research that concludes typically with specific forecasts of future exchange rates at various points in time, such as one, three and six months hence. Consumers of these forecasts need to use them carefully.

History has demonstrated that whenever a group of analysts are polled on their forecasts on the expected future price of a currency, the predicted prices commonly have a statistical distribution in which half of the predictions are for higher prices and the other half are for lower prices. No matter how well researched, reasoned and credible a particular forecast appears to be, the probability is high that it will be off the mark since a forecaster must predict correctly the direction and anticipated magnitude of the expected price change over a particular time horizon. Even consensus forecasts that average numerous predictions have usually been unreliable.

Directional forecasts are a different matter. In a study published in the AIMR 1999 Conference Proceedings, Levich (1999) conjectured that “Forecasting currency is not hard when one realises that accuracy is not essential for most investors. What is important is getting the direction of the forecast right.” Hence, trend-following, which relies on getting the direction right, has emerged as one of the trading strategies that have been applied successfully in foreign exchange management for several decades.

The difficult task of forecasting future exchange rates has led currency managers, whether they manage exchange rate risk in a currency hedging/currency overlay programme or produce investment returns, to develop and employ strategies that do not rely on fundamentally based forecasts. Instead, these managers have developed techniques that identify the likely direction of a currency’s price change and methods that exploit other factors such as interest rate differentials. These trading strategies can be broadly categorised as “value”, “carry” and “trend-following.” Each strategy can be applied individually or in combinations to achieve desired risk and return objectives. There are also discretionary traders, who may be less systematic in their approach to taking positions in currencies.

VALUE

Investing in currencies based on perceived valuations is a strategy that most closely resembles investing in equities and other asset classes since the strategy’s focus is to buy undervalued currencies and sell currencies that are overvalued. Currency managers typically use some measure of purchasing power parity (PPP) to determine if a currency is overvalued or undervalued relative to its “real” inflation-adjusted exchange rate. The PPP theory proposes that it should take the same amount of dollars to buy UK pounds, for example, and to then use the pounds to purchase a basket of goods, as it would cost to buy that basket of goods with the dollars.

Currency exchange rates respond to relative rates of inflation between countries over the long term; a country that has an inflation rate higher than that of another country will see its currency depreciate in value over time, while the other country’s currency will appreciate. Thus, the price of a basket of goods in a country with higher inflation will increase over time in that country’s currency but not necessarily in the other country’s currency, since it will purchase more of the depreciated currency. However, the relationship between inflation and currency exchange rates is not linear; currencies have historically become significantly overvalued and undervalued relative to their equilibrium “real” exchange rates, and often for several years since numerous factors other than inflation drive currency prices.

Whether a currency is overvalued or undervalued is measured as a deviation from a currency’s equilibrium real exchange rate: the exchange rate that would prevail if only relative rates of inflation between two countries influenced currency prices. If a currency’s exchange rate is lower than its estimated equilibrium real exchange rate, it is deemed to be undervalued, and is a candidate to be bought. Conversely, it is seen as overvalued if it is determined to be above equilibrium its real exchange rate, and thus is a currency to be sold.

Under the assumption that currencies that are overvalued or undervalued will revert toward their real exchange rates through market arbitrage, trade flows and other factors, currency managers have developed methods to calculate equilibrium real exchange rates based on relative inflation rates, applying various measures and formulas to assess if a currency is overvalued or undervalued. In its simplest form, to implement a value approach to investing in the G10 currencies entails ranking them by how much they are overvalued and undervalued relative to the base currency, and then buying those currencies that are most undervalued while selling those that are most overvalued, re-ranking the currencies on a regular basis (monthly, quarterly) and then re-balancing the positions accordingly. Mechanically applied, sets of such rules have been shown to generate positive returns over the long term.

One of the simplest yet most powerful measures of purchasing power parity is the “Big Mac index” published by the Economist. It is assumed that a McDonald’s Big Mac hamburger should cost the same in each country. Ranking countries by the price of the Big Mac, a simple measure of overvaluation and undervaluation is obtained that has proved to be surprisingly accurate over time.

CARRY

Carry strategies are based on exploiting differences in short-term interest rates between countries. The theory of uncovered interest rate parity (UIP) stipulates that the expected gain from holding a currency with a high interest rate over a currency with a low interest rate will be eliminated by the high interest rate currency depreciating to offsets the interest rate differential.

According to the UIP theory, a currency’s forward price (today’s price for delivery on a particular future date) is its current spot price adjusted for the difference in the interest rates to that future date, the value date. Theory predicts that when the forward rate matures, its historical price and the spot price on the value date will be equal. However, reality has been different: forward rates have overestimated consistently the degree of depreciation by the spot price, and the forward rate has also gotten the direction of changes in spot prices wrong since currencies with high interest rates often appreciate for long periods against currencies with low interest rates.

Many explanations have been given for why the theory does not work in practice. It suffices to note that there are so many different factors that influence exchange rates and different types of market participants with different trading and investment objectives that currency prices are consistently influenced in ways that make them deviate from those stipulated by the theories of PPP and UIP in the short to intermediate term.

In its simplest form, a carry strategy using only G10 currencies involves ranking them by their interest rates, highest to lowest, and then buying (investing in) the two or three currencies that have the highest interest rates while selling (borrowing in) the two or three currencies that have the lowest interest rates. The currencies are typically re-ranked on a monthly basis and the positions re-balanced accordingly.

Carry strategies have historically generated solid returns, but they have also subjected investors to occasional large and sudden losses. That is a weakness that was painfully highlighted during the financial crisis of 2007–08, when low interest rates currencies such as the Japanese yen surged against high interest rate currencies such as the UK pound and the Australian dollar. The large losses emerged rapidly, and carry strategies were forced to close or reverse positions as liquidity diminished in the market. As a result, it has become more widely recognised that carry strategies are subject to periodic “crash risk.” Consequently, currency managers that employ carry strategies have researched methods that can flag when a carry strategy may be at risk of not performing.

One of the outcomes of the financial crisis was that short-term interest rates were reduced to nearly 0% in many of the G10 currency countries, and maintained at these levels for a number of years. That made it more difficult for carry strategies using only G10 currencies to perform as well as before 2007–08.

Value and carry strategies are two sides of the same coin. Countries that have current account deficits and/or high inflation rates typically keep their interest rates high to attract capital, while domestic investors demand interest rates that are sufficiently high to compensate them for the erosion in purchasing power that the inflation causes. The opposite is true for countries that have current account surpluses and/or low inflation. They typically maintain low interest rates to deter capital from flowing into the country, and do not need high interest rates to compensate domestic investors for the ill effects of high inflation when inflation is low.

Since a country with high interest rates tends to attract capital, its currency tends to rise even though its high interest rates are a reflection of high inflation, and thus, according to the PPP, the currency should depreciate. Since carry strategies involve buying high interest rate currencies, carry investors help drive high interest rate currencies up and low interest rate currencies down. As these upward and downward trends are extended, value investors will increasingly sell the high-yielding currency as it becomes increasingly overvalued based on measures of PPP and real exchange rates, while buying low-yielding currencies anticipating that these currencies will revert toward their “real” exchange rates. Thus, value and carry strategies benefit at different times from the cycles of extended periods of upward and downward price trends that unfold in currencies over several years.

TREND-FOLLOWING

Currencies have a long history of moving in upward and downward trends that can last for several years, as was illustrated in Figures 12.1–12.4. They also trend over shorter periods of time. As short- and long-term price trends exist in currencies, currency managers have developed strategies that are designed to buy upward trending currencies and sell downward trending currencies. Although statistical analysis has demonstrated that there is no (or very weak) serial correlation in currency prices, and therefore that currencies appear to follow a “random walk” preventing trend-following (in theory) from being profitable, currency managers that employ trend-following techniques have generated substantial profits over time. Trend-following strategies in different forms are therefore used by a large number of currency managers.

Trend-following as a successful investment strategy in currencies is supported by academic research. Many studies have demonstrated that momentum exists in currencies as it does in equities and other asset classes. One such example is a study by Menkhoff et al. (2011), which examined 40 years of currency price data and found that various strategies that involved buying those currencies that had appreciated the most over a one-year period (or other periods) while selling those that had depreciated the most over the same period and rebalancing regularly could have generated significant returns over time; a currency that had appreciated (trended up) could be expected to continue to rise, while a currency that had depreciated could be expected to continue to decline (trend down). This is an observation that traders summarised many decades ago in the expression “the trend is your friend”, sometimes with the added caveat: “until it ends”.

However, the focus of trend-following currency investment managers is generally to harvest gains from price trends that are short term in nature – trends that may last a few days, a few weeks or a few months. These are time horizons in which fundamental forecasting has proved to be extremely difficult, if not futile. The aim of trend-following is not to attempt to understand what the economic fundamentals are that drive a currency up or down and how they may influence the future price, but to observe, identify and benefit from the flow of money in and out of currencies – for whatever reasons – and to participate in that flow by investing in line with the observed trends created by that flow of money.

Currency managers utilise different techniques to identify price trends, and usually work with proprietary models that have been developed to find price trends and that can signal when to establish and when to exit currency positions as price trends change. These models and strategies can incorporate moving averages, momentum measures, pattern recognition, break-out rules and other technical and statistical methods that have proved to be useful in identifying directions and changes in price trends.

DISCRETIONARY

Although most currency managers employ their strategies in a systematic and disciplined fashion to profit from the factors they attempt to exploit, currencies can also be managed in a discretionary fashion where a manager relies on extensive experience in trading currencies to take positions in anticipation of – or in reaction to – news and information that impact currencies in the short and long term. Discretionary currency managers may also employ technical trading techniques and flow-of-funds data collected by bank trading desks that identify the flow of money in and out of currencies.

However, since institutional investors typically favour investment processes that are systematic, disciplined and can be replicable through time and that do not depend on a particular person’s skillset, discretionary currency managers comprise a small subset of investment strategies that have attracted assets from institutional investors.

RISK MANAGEMENT

A portfolio of G10 currency positions is similar to other types of investment portfolios; it is subject to an assortment of risks that can cause instant losses or a series of losses. Currency portfolios are frequently managed with leverage to increase the return to make it competitive with the returns of other asset classes and alternative strategies. The use of leverage has its own risks that need to be managed.

As mentioned, the ability to reduce risk in a G10 currency portfolio through diversification is limited due to the strong and persistent correlations between the four groups of currencies. A currency manager’s focus in terms of managing risk must therefore be to determine the size of the total exposure, whether positions are long or short, the relative size of the various positions, the risk of a regime change, leverage applied and how and when the leverage should be adjusted.

Traditional risk measures, such as various types of value-at-risk (VaR), can be employed to estimate the probability and the potential size of losses with various levels of statistical confidence. However, among the problems with these traditional statistics is the assumption that currency price changes have a statistical distribution that is normal, when, in fact, currency price distributions have fat tails; the risk of a sudden loss is higher than the normal distribution predicts. Many of the price changes that form the fat tails of distributions of short-term price movements in currencies are often caused by unexpected events – ie, event risk.

EVENT RISK

Event risk is ever-present, and the timing of an unfavourable (or favourable) event cannot be predicted in advance. By definition, the event is a surprise. To illustrate, the tsunami that ravaged Japan in March 2011 could not be predicted, as it was triggered by an earthquake. The Japanese yen reacted violently as currency traders and investors suddenly, and without warning, had to reposition themselves to adjust to the new reality as they had to make “snapshot” judgements as to what the tsunami’s impact would be on Japan, its economy and the yen in the short and long term.

The use of a stop-loss is usually ineffective to protect against event risk since prices can react violently and leave gaps in quoted prices series. There simply are no bids and transactions in those gaps, and that can prevent a position from being closed at or near a pre-set stop-loss price.

Comparatively, each G10 currency is significantly less risky than individual equities; an earnings report that surprises can cause a stock’s price to jump or plunge by 10% or much more in a matter of minutes. The G10 currencies, which can be seen as each representing a country’s economy, have historically not been subject to such massive price changes over brief periods of time, while the risk of a formal devaluation of a G10 currency in the floating currency exchange rate regime that has been in place since the mid-1970s is a highly unlikely event (although it could be a significant risk for an EM currency). Consequently, even though event risk is ever-present, the impact of a surprise on a G10 currency’s price can be expected to be lower than that on prices of other asset classes.

VOLATILITY RISK AND OPPORTUNITY

Currencies do not pay dividends, nor do they gain in value as equities do in response to growing and retained earnings that boost a company’s net worth over time. Additionally, despite the fact that differences in interest rates between G10 currencies can be exploited to harvest returns, the existence of price trends in currencies is the most critical element for most currency investment strategies to generate gains regardless of the decision process used to enter and exit currency positions.

Volatility is not stable: it fluctuates through time, and is both a risk and an opportunity. It is useful to think of volatility as ranging from low to high, and as “directional” and “non-directional” in terms of dealing with volatility as a risk. In a period of high volatility, the average daily price change is above that of its long-term average volatility; in a period of low volatility, the average daily price change is below its long-term average. Directional volatility is when the daily price fluctuations create upward- or downward-sloping trends. Non-directional volatility is when prices move sideways.

Combinations of volatility and direction result in four distinct market environments in which currency managers operate to harvest gains and avoid losses.

• High directional volatility – Prices trend strongly up or down and provide opportunities to harvest potentially large gains, while losses can become large if a position with a growing loss is not closed or reduced.

• Low directional volatility – Prices trend slowly up or down and provide opportunities to harvest only modest gains, while the risk of large losses is reduced due to the lower volatility.

• Low non-directional volatility – Prices move sideways in a narrow band; the daily fluctuations have low amplitude; there is limited opportunity for managers to harvest gains, while the risk of large losses is low.

• High non-directional volatility – Prices move sideways but with higher short-term amplitude than normal; this environment can cause trading systems to generate a number of buy and sell signals that can result in a string of losses.

Identifying the four market environments ahead of time is difficult, but can be highly profitable if a trading system can take advantage of the periods of directional volatility in specific currencies. It can also help to avoid losses in the most risky market environment of high non-directional volatility by having smaller positions, reduced leverage or more diversified positions.

REGIME SHIFT RISK

Prior to the financial crisis of 2007–08, carry strategies had performed well for a long time since differences in interest rate levels between the G10 currencies were meaningful. However, after the crisis, when central banks reduced interest rates to nearly 0% in most of the G10 currencies, it became more difficult for carry strategies to produce gains similar to those of the past.

Changes in regimes are extremely difficult to predict, but have become the focus of research aimed to discover methods to reduce the negative fall-out from an unanticipated regime change. Whether methods developed by currency managers employing carry strategies will work as anticipated when the next regime change occurs remains to be seen. Efforts to modify regime change risk can include monitoring fundamental economic data to identify changes and trends that may signal a larger change in an economy or the global economy.

SIZING POSITIONS

Due to the correlations between the G10 currencies, sizing the individual positions in a portfolio can be one of the key factors that can generate a higher return, while the risk of loss can be amplified by a mis-allocation. Various methods can be used to size positions differently. For example, if the dollar is declining against the euro and the yen, a cross-rate model can identify whether the yen is likely to rise or decline against the euro. If the yen is likely to rise, it is sensible to increase the long position in the yen against the dollar relative to a long position in the euro against the dollar to increase the expected gain. However, if the “bet” is wrong and both currencies decline, the risk of a larger loss has increased by making that allocation.

Managers rely on different techniques and strategies to dynamically size positions over time but, regardless of the method used, it needs to be robust and agile to reduce the risk of loss when positions have been incorrectly sized and gains do not materialise as expected.

LEVERAGE

Managing the leverage of a currency portfolio is a critical process since elevated leverage in a period of high non-directional volatility (when the risk of loss is high) can become costly, while it can significantly increase the total return when volatility is high and directional. Systematically and dynamically adjusting the leverage in line with changes in volatility is one way it can be managed; another is to base it on combinations of signals that can be seen as increasing the probability and the confidence that a price trend in place is likely to persist.

MEASURING PERFORMANCE

The fact that simple and mechanical implementation of value, carry and trend-following strategies can generate returns over the long term without “active” management has introduced the ability to measure the “beta” and “alpha” of active currency manager returns. In the world of equities, beta is the return achieved from a passive investment in the securities included in an index such as the S&P 500 index, while alpha is the return that exceeds the beta and has been achieved by a manager actively managing the portfolio. Historically, it has been difficult for equity managers to beat the market over long periods and by significant amounts.

Research on currency manager returns has demonstrated that some currency managers can generate alpha over long periods, and have the skills to generate returns that justify paying them management and incentive fees. At a practical level, investors look at total returns achieved by a currency manager and then decide if they match expectations and returns available in other asset classes and strategies. Often overlooked in making these assessments are differences in the quality of the returns. To illustrate, an equity manager with a mandate to be “fully invested” may have an annual return of 9% when the benchmark rose 8%, resulting in an added value of 1%. A currency manager with a return of 5% over the same period may look inferior, but since the currency manager did not have a mandate to be “fully invested” but had to decide constantly on whether to hold long or short positions, in which currencies, how to size them and what leverage to use, the currency manager was responsible for creating the entire 5% while the equity manager was responsible for creating only the added value of 1%.

Since currency portfolio returns largely derive from actively managing positions in the short term, the return stream of a G10 currency portfolio, particularly if generated through trend-following, can be significantly negatively correlated to that of equities in periods of market stress. Many alternative investment strategies and asset classes lack this attribute, which makes it particularly attractive to include an actively managed G10 currency strategy in investment portfolios to achieve overall risk reduction, while benefitting from the positive returns an active currency portfolio can contribute. Since a G10 currency portfolio does not explicitly include positions in EM currencies, and the G10 currencies are the most liquid currencies, they are not subject to the risks that EM currencies can introduce into a currency portfolio: sudden large price changes and illiquidity when EM currencies fall.

CONCLUSION

The G10 currencies are the most liquid currencies in the world; close to 90% of the daily global trading volume flows through these currencies. While the universe of the 10 currencies suggests that investing in them provides a sufficient degree of diversification, the fact that many of them correlate strongly with each other, regardless of the base currency used, limits the level of risk that can be diversified away. Risk must therefore be managed at different levels to achieve targeted risk and return objectives; positions, relative size of positions, volatility and leverage are factors that must be closely managed to achieve success.

Currency managers have developed a number of styles that they employ based on features of the currency market that have proved to persist through time: value, carry and trend-following have become distinct strategies, each with different risk and return profiles that can be partly replicated with simple, mechanical, unmanaged strategies designed to capture the “beta” of currencies.

One aspect of investing in currency is that the employed strategies typically generate a good portion or all of the return from short-term price trends. This generates return streams that can be significantly negatively correlated to those of equities in particular. As a result, institutional investors need to evaluate currency manager returns not simply as that of an asset class, but also how the inclusion of an actively managed portfolio of G10 currencies can reduce overall portfolio risk, particularly in times of equity market stress when the correlations of many asset classes and alternative investment strategies tend to converge towards one.

References

Levich, Richard M., 1999, “Can Currency Movements Be Forecasted?”, Association for Investment Management and Research, Conference Proceedings, June, pp 30–39.

Menkhoff, Lukas, Lucio Sarno, Maik Schmeling and Andreas Schrimpf, 2011, “Currency Momentum Strategies”, Bank for International Settlements Working Paper No 366, December.

prev chapter next chapter

Contents

1.

A Case for Currency in Institutional Portfolios

2.

The Currency Conundrum: Regret Versus Optimal Hedging

3.

Global Asset Allocation and Optimal US Dollar Hedging

4.

Alternative Currency Hedging Strategies with Known Covariances

5.

Strategic Asset Allocation and Currency Betas

6.

Separating Currency Returns from Asset Returns in Theory and Practice: Conscious Currency and Beyond

7.

Economic Data Surprises and Currency Alpha

8.

Is Trend Following in Foreign Exchange Markets Going Out of Fashion?

9.

The Carry Trade: The Essentials of Theory, Strategy and Risk Management

10.

Carry Trades in Emerging Markets

11.

Investing in Emerging Market Currencies: A Rewarded Risk

12.

The Currency Investing Process: Managing G10 Currencies

13.

Systematic Currency Trading

14.

A Discretionary Approach to Currency Investing

15.

Due Diligence as a Source of Alpha

16.

Currency Forecasting: Generating Views about Foreign Exchange

17.

Exchange Rates, Risk Premia and Inflation-indexed Bond Yields

18.

Currency Investing: A Risk Premium Approach

19.

Currency Management Styles: Ten Years On

20.

The Future of Currency Investing in Institutional Portfolios