Currency Management by International Fixed Income Mutual Funds

64 Pages Posted: 25 Nov 2020 Last revised: 13 Jan 2021

See all articles by Clemens Sialm

Clemens Sialm

University of Texas at Austin - McCombs School of Business; National Bureau of Economic Research (NBER)

Qifei Zhu

Nanyang Technological University (NTU) - Nanyang Business School

Date Written: November 15, 2020

Abstract

Investments in international fixed income securities are exposed to significant currency risks. We collect novel data on mutual fund currency derivatives and document that over 90 percent of U.S. international fixed income funds use currency forwards to manage their foreign exchange exposure. Fund currency strategies differ substantially based on risk management demands related to the currency denominations, speculative demands such as currency momentum and carry trade, and incentives related to past performance and fund clienteles. Funds that hedge their currency risk exhibit lower return variability, but do not generate inferior risk-adjusted returns.

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

JEL Classification: F31, G15, G23, G32

Suggested Citation

Sialm, Clemens and Zhu, Qifei, Currency Management by International Fixed Income Mutual Funds (November 15, 2020). Available at SSRN: https://ssrn.com/abstract=3732286 or http://dx.doi.org/10.2139/ssrn.3732286

Clemens Sialm (Contact Author)

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

HOME PAGE: http://faculty.mccombs.utexas.edu/Clemens.Sialm/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Qifei Zhu

Nanyang Technological University (NTU) - Nanyang Business School ( email )

Singapore, 639798
Singapore

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