Currency Management by International Fixed Income Mutual Funds

Investments in international fixed income securities are exposed to significant currency risks. We collect novel data on currency derivatives used by U.S. international fixed income funds. We document that while 90% of funds use currency forwards, they hedge, on average, only 18% of their currency exposure. Funds' currency forward positions differ substantially based on risk management demands related to portfolio currency exposures, return-enhancement motives such as currency momentum and carry trade, and strategic considerations related to past performance and fund clienteles. Funds that hedge their currency risk exhibit lower return variability, but do not generate inferior abnormal returns.

Keywords: currency risk, forward contracts, mutual funds, fixed-income securities, performance

JEL Classification: F31, G15, G23, G32

Suggested Citation: Suggested Citation

Sialm, Clemens and Zhu, Qifei, Currency Management by International Fixed Income Mutual Funds (June 30, 2022). Nanyang Business School Research Paper No. 20-29, Available at SSRN: https://ssrn.com/abstract=3732286 or http://dx.doi.org/10.2139/ssrn.3732286