Should Investors Avoid or Seek Out Currency Risk? How to Resolve a Long-Standing Puzzle

18 Pages Posted: 1 Dec 2017

See all articles by Momtchil Pojarliev

Momtchil Pojarliev

Fischer Francis Trees & Watts, Inc.

Richard M. Levich

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: November 29, 2014

Abstract

The question of how to manage currency risk in institutional portfolios has been controversial since the modern surge in global investing started to take root in the 1970s. Fund managers tend to hedge some or all of their embedded currency exposure, but few pursue currency returns separately with a specially designed currency investment plan. In this paper, we argue that institutional investors ought to hedge a larger portion, and logically all, of the currency exposure in their underlying assets and then make use of the resulting portfolio risk reduction to engage in purposeful currency investing designed to produce alpha- and beta-style returns that are largely uncorrelated with traditional risky assets.

Suggested Citation

Pojarliev, Momtchil and Levich, Richard M., Should Investors Avoid or Seek Out Currency Risk? How to Resolve a Long-Standing Puzzle (November 29, 2014). Journal of Financial Perspectives, Vol. 2, No. 3, 2014. Available at SSRN: https://ssrn.com/abstract=3079714

Momtchil Pojarliev (Contact Author)

Fischer Francis Trees & Watts, Inc. ( email )

200 Park Avenue, 11th Floor
New York, NY 10166
United States

Richard M. Levich

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0422 (Phone)
212-995-4256 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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