Currency Hedged Return Calculations

Abstract

We see a contrast between the importance of the currency risk factor in modern investment management and its treatment in portfolio analytics like performance attribution and risk budgeting. Part of this can be explained by conceptual complexities: currencies are not just another asset class, but a risk exposure embedded in any assets and therefore affecting the overall portfolio in non-trivial ways. This research note addresses one particular aspect of currency risk analytics, namely the calculation of hedged asset currency returns. Such calculations are used in “paper portfolios” like benchmarks and generally ex ante performance and risk analytics.

Keywords: Currency, Risk, Portfolio, Return, Calculation

JEL Classification: C63