ternal HedgingThere are of course well-known methods of hedging internally, such as:
r Netting (debt, receivables and payables are netted out between group companies)r Matching (intragroup foreign currency inflows and outflows)r Leading and lagging (adjustment of credit terms before and after due date)r Price adjustment (raising/lowering selling prices to counter exchange rate moves)r Invoicing in foreign currency (thus reducing transaction risk)r Asset and liability management (to manage balance sheet, income, cash flow risk)
10.9.3 Key Operational Controls for TreasuryAssuming that the corporation has accepted in principle that it needs to manage its currencyrisk, it then has several choices to make with regard to how it will go about achieving this – theinstruments it will allow itself to use, the type of currency hedging carried out, positional andcredit limits and so forth. All of these matters need to be dealt with in a systematic and rigorousway at the start, before the currency hedging programme begins. Performance measurementstandards, accountability and limits of some form must be part of a Treasury foreign currencyhedging programme. Management must elucidate specifically the goals and the operationallimits of such a programme.10.9.4 OptimizationFor a given exchange rate view, an optimization model can create an “efficient frontier” ofhedging strategies to manage currency risk. The most efficient hedging strategy is that whichis the cheapest for the most risk hedged. This is a very efficient and useful tool for hedgingcurrency risk in a more sophisticated way than just buying a vanilla hedge and “hoping” thatit is the appropriate strategy. Hedging optimizers frequently compare the following strategiesto find the optimal one for the given currency view and exposure:
r 100% hedged using vanilla forwardsr 100% unhedgedr Option risk reversalr Option call spreadr Option low-delta call
10.9.5 Budget RatesThe budget exchange rate can drive both the corporation’s hedging strategy and its pricingstrategy as well, and can be set in a number of ways. It can simply be the spot exchange rate at theend of the previous fiscal period. This is often referred to as the accounting rate. Alternatively,when dealing with forecasted cash flows, the issue becomes slightly more complex.
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Theoretically, the budget exchange rate should be derived from the domestic sales priceand the foreign subsidiary sales price. Thus, if the parent sales price for a good is USD10and the Euro area sales price for argument’s sake is EUR15, the theoretical budget rate wouldbe 0.67. The Euro–dollar exchange may be different from that, so the corporation needs toevaluate whether there is room to change its Euro-denominated pricing without reducing marginsubstantially in order to set a budget rate that is closer to the spot exchange rate. If there is amajor difference between the spot exchange rate and the budget rate, the corporation may haveto reassess its currency risk management policy. Once the budget rate is set, the Treasury has tosecure an appropriate hedge rate and ensure minimal slippage relative to that hedge rate. Timingand the instruments used are key to achieving that. Finally, it is important to note that the budgetrate comes from relative price differentials. This however is also at the heart of PPP, whichstates that exchange rates should adjust for relative price differentials of the same good betweentwo countries. Thus, a corporation could use PPP as a benchmark for setting budget rates.
10.10 MANAGING CURRENCY RISK II – THE INVESTORManaging currency risk remains a controversial issue for institutional investors. At one end ofthe spectrum, you have many international equity funds who either do not hedge their currencyrisk or use an unhedged currency benchmark. At the other end, you have fixed income fundsthat use a currency overlay manager to manage their currency risk actively. To be sure, this is agross generalization. There are equity funds that do manage their currency risk, whether on apassive or an active basis, and equally there are fixed income funds that make a deliberate choicenot to hedge their currency risk. That said, it is the case that fixed income funds are generallymore responsive to the idea of managing their currency risk separately and independently fromthe underlying than their equity fund counterparts, because currency risk empirically makes upa substantially higher portion of the average return volatility of a fixed income portfolio thanfor an equity portfolio. The figures are roughly 70% and 30% respectively, not least becauseequities are generally more volatile than bonds. When investing abroad however, there are twocore principles concerning currency risk:1. Investing in a country is not the same as investing in that country’s currency.2. Currency is not the same as cash; the incentive for currency investment is primarily capitalgain rather than income.Like corporations, institutional investors face transaction risk when they make investmentsin a foreign currency. They also face translation risk on net assets if they spread their operationsoverseas. Whether or not it is done by the same individual, it is a core view of this book thatcurrency risk and underlying asset risk should be managed separately and independently fromeach other. The way currencies and underlying assets are analysed and the way they trade areboth different from each other. Consequently, the way they should be managed should also bedifferent.Having decided to manage a portfolio’s currency risk, one then has to decide whether theaim is to achieve total returns or relative returns.10.10.1 Absolute Returns: Risk ReductionJust as a corporation has to decide whether to run their Treasury operation as a profit or asa loss reducing centre, so a portfolio manager has to make the same choice in the approachthey take to managing currency risk. If a portfolio manager is focused on maximizing absolute
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returns, the emphasis in managing their currency risk is likely to be on risk reduction. Inorder to achieve this, they will most likely adopt a strategy of passive currency management.This involves adopting and sticking religiously to a currency hedging strategy, rolling thosehedges during the lifetime of the underlying investment. The two obvious ways of establishinga passive hedging strategy are:
r Three-month forward (rolled continuously)r Three-month at-the-money forward call (rolled continuously)The advantage of passive currency management is that it reduces or eliminates the currencyrisk (depending on whether the benchmark is fully or partially hedged). The disadvantage isthat it does not incorporate any flexibility and therefore cannot respond to changes in marketdynamics and conditions. The emphasis on risk reduction within a passive currency management style deals with the basic idea that the portfolio’s return in the base currency is equal to:The return of foreign assets invested in + the return of the foreign currencyThis is a simple, but hopefully effective way of expressing the view that there are twoseparate and distinct risks present within the decision to invest outside of the base currency.The motive of risk reduction is therefore to hedge to whatever extent decided upon the returnof the foreign currency.10.10.2 Selecting the Currency Hedging BenchmarkThe most disciplined way of managing currency risk from a hedging perspective is to use acurrency hedging benchmark. There are four main ones:
r 100% hedged benchmarkr 100% unhedged benchmarkr Partially hedged benchmarkr Option hedged benchmarkBeing 100% hedged is usually not the optimal strategy, apart from in exceptional cases.Equally, using a currency hedging benchmark of 100% unhedged would seem to defeat the object. Many funds are not allowed to use options, thus in most cases the best hedging benchmarkto use is partially hedged.10.10.3 Relative Returns: Adding AlphaPortfolio or asset managers who are on the other hand looking to maximize relative returnscompared to an unhedged position will most likely adopt a strategy of active currency management whether the emphasis is on adding alpha or relative return. Either the portfolio manageror a professional currency overlay manager will “trade” the currency around a selected currency hedging benchmark for the explicit purpose of adding alpha. In most cases, this alphais measured against a 100% unhedged position, although it could theoretically be measuredagainst the return of the currency hedging benchmark. With active currency management, theemphasis should be on flexibility, both in terms of the availability of financial instrumentsone can use to add alpha and also in terms of the currency hedging benchmark itself. On thefirst of these, an active currency manager should have access to a broad spectrum of currencyinstruments in order to boost their chance of adding value. Similarly, their ability to add value is
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significantly increased by the adoption of a 50% or symmetrical currency hedging benchmarkrather than by a 100% hedged or 100% unhedged benchmark.10.10.4 Tracking ErrorJust as corporations have to deal with “forecasting error” in terms of the deviation of forecastexchange rates relative to the actual future rate, so investors have to deal with tracking errorwithin their portfolios, which is the return of the portfolio relative to the investment benchmarkindex being used. A portfolio manager can significantly affect the tracking error of theirportfolio by the selection of the currency hedging benchmark. Empirically, it has been foundthat a 50% or symmetrical currency hedging benchmark generates around 70% of the trackingerror of that generated by using a polar of 100% currency hedging benchmark. Put anotherway, the tracking error of a polar currency hedging benchmark is around 1.41 times that of a50% hedged benchmark. The advantage of a symmetrical or 50% currency hedged benchmarkfor a portfolio manager is that it reduces tracking error and it also enables them to participatein both bull and bear currency markets.Two popular types of active currency management strategy are the differential forward strategy and the trend-following strategy. Both of these strategies have consistently added alpha to aportfolio if followed rigorously and interestingly have also proven to be risk reducing comparedto unhedged benchmarks. Thus, they also help to boost significantly the portfolio’s Sharpe ratio.10.10.5 Differential Forward StrategyForward exchange rates are very poor predictors of future spot exchange rates, in contrast tothe theories of covered interest rate parity and unbiased forward parity. As a result, one cantake advantage of these apparent market “inefficiencies” by hedging the currency 100% whenthe forward rate pays you to do it and hedging 0% when the forward rate is against you. Thedifferential forward strategy has generated consistently good results over a long time and overa broad set of currency pairs.10.10.6 Trend-Following StrategyThe idea behind this strategy is to go long the currency pair when the price is above a movingaverage of a given length and to go short the currency pair when it is below. Currency managerscan choose different moving averages depending on their trading approach to the benchmark.Lequeux and Acar (1998) showed that to be representative of the various durations followedby investors, an equally weighted portfolio based on three moving averages of length 32, 61and 117 days may be appropriate. If the spot exchange rate is above all three moving averages,hedge the foreign currency exposure 100%. If above two out of the three, hedge one-third ofthe position. In all other cases, leaves the position unhedged. Trend-following strategies haveshown consistent excess returns over sustained periods of time.10.10.7 Optimization of the Carry TradeAs with corporations, institutional investors can use optimization techniques. With corporations, the aim is to achieve the cheapest hedge for the most risk hedged. In the case of theinvestor, the aim here is to add alpha by improving on the simple carry trade. The idea behind
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the carry trade itself is that, using a risk appetite indicator, the currency manager goes long abasket of high carry currencies, when risk appetite readings are either strong or neutral, andconversely goes short that basket of currencies when risk appetite readings go into negativeterritory.It is possible to fine tune or optimize this strategy to take account of the volatility andcorrelation of currencies in addition to their yield differentials. This should produce betterreturns than the simple carry trade strategy. The optimized carry trade hedges the currencypairs according to the weights provided by the mean–variance optimization rather than simplyhedging the currency pairs exhibiting an attractive carry. The returns generated by the optimizedcarry trade strategy are actually better than those generated by the differential forward strategyon a risk-adjusted basis.
10.11 MANAGING CURRENCY RISK III – THE SPECULATORIf the idea of currency hedging is controversial to some, then that of currency speculation is evenmore so. Currency speculation – that is the trading of currencies with no underlying, attachedasset – makes up the vast majority of currency market flow. Given that the currency marketprovides the liquidity for global trade and investment, it is therefore currency speculationthat is providing this liquidity. When looking at the issue of currency speculation, one shouldimmediately dispense with such descriptions of it being a “good” or a “bad” influence andinstead focus on what it provides. It is neither a benign nor a malign force. Rather, its solepurpose is to make money. Furthermore, it does not act in a vacuum, but instead represents themarket’s response to perceived fundamental changes. Thus, it is a symptom rather than thedisease itself, which is usually bad economic policy. Currency speculators are usually made upof one of three groups – interbank dealers, proprietary dealers, or hedge or total return funds.However, at times, currency overlay managers or corporate Treasurers can also be termedcurrency speculators if they take positions in the currency markets, which have no underlyingattached asset.
10.12 CURRENCY STRATEGY FOR CURRENCYMARKET PRACTITIONERSHaving gone through the main points that we have covered in this book so that they are clear, itis now time to put them into practice. Currency market practitioners can use currency strategytechniques for basically two activities:
r Currency tradingr Currency hedging10.12.1 Currency TradingThis section includes currency speculators and active currency managers. Some corporateTreasuries are run as a profit centre and thus this part will also be of interest to them. For thepurpose of dividing currency activity into trading and hedging, we assume the generalizationthat corporate Treasury for the most part uses the currency market for hedging purposes. Theaim here is to show how a currency market practitioner can combine the strategy techniquesdescribed in this book for the practical use of trading or investing in currencies. Given that I
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focus primarily on the emerging market currencies, we will keep the focus to that sector of thecurrency market, though clearly these strategy techniques can and should be used for currencyexposure generally. The example we use here is that of a recommendation I put out on January10, 2002. The key point here is not just that the recommendation made or lost money, but alsohow the strategy was arrived at. The aim is not to copy this specific recommendation, but tobe able to repeat the strategy method. Note that these types of currency strategies should beattempted solely by professional and qualified institutional investors or corporations.ExampleOn January 10, 2002, I released a strategy note, recommending clients to sell the US dollaragainst the Turkish lira, via a one-month forward outright contract. For the past couple ofmonths, we had been taking a more positive and constructive view on the Turkish lira, in linewith the price action and more positive fundamental and technical developments. Thus, wecame to the conclusion that while the Turkish lira remained a volatile currency, it was trendingpositively and was likely to continue to do so near term. Hence, we recommended clients to:
r Sell USD–TRL one-month forward outright at 1.460 millionr Spot reference: 1.395 millionr Target: 1.350 millionr Targeted return excluding carry: +3.2%r Stop: 1.460 million
From a fundamental perspective, we at the time took a constructive view on Turkey’s 2002economic outlook. While recognizing persistent risks to that outlook, the prospects for a virtuous circle of investor confidence appeared to have improved significantly. To recap, the Turkishlira had devalued and de-pegged in February of 2001 and since then had fallen substantiallyfrom around 600,000 to the US dollar before the peg broke to a low of 1.65 million. Thatdecline in the lira’s value had severe consequences for the economy, triggering a dramaticspike in inflation. Indeed, in the third quarter of 2001, currency weakness and rising inflationappeared to have created a vicious circle, whereby each fed off the other.The CEMC model tells us however that the low in a currency’s value after de-peggingand the high in inflation are highly related, and that Phase II of the model is related to aliquidity-driven rally in the value of the currency after inflation has peaked. By the end of2001, inflation had clearly peaked on a month-on-month basis and was close to peaking on ayear-on-year basis at just over 70%. Thus, from the perspective of the CEMC model, the signswere positive as regards prospects for a continuation of the rally in the Turkish lira, which hadbegun somewhat tentatively in November 2001. A further positive sign, also in line with PhaseII of the CEMC model, was a massive and positive swing in the current account balance, froma deficit of around 6% of GDP in 2000 to a surplus of around 1% in 2001. This was largelydue to the collapse of import demand in the wake of the pegged exchange rate’s collapse,just as the CEMC model suggests. In January 2002, what we were witnessing was a classicliquidity-driven rally in a currency that had hit its low after breaking its peg the previous year.This phenomenon was far from unique to the Turkish lira. Exactly the same phenomenon wasseen in the Asian currencies after their crisis in 1997–1998, and to some extent also in theRussian rouble and Brazilian real.In addition to such economic considerations, favourable political considerations were alsoan important factor, keeping Turkey financially well supported, particularly in the wake of the
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successful passage of such important legislation as the tobacco and public procurement laws.Strong official support for Turkey at the end of 2001 appeared to make 2002 financing androllovers look manageable. Finally, “dollarization” levels – that is the degree to which Turkishdeposit holders were changing out of lira and into US dollars – appeared to have peakedin November 2001, after soaring initially in the wake of the lira’s devaluation in February2001. In our view, if the 1994 devaluation was any guide, this process of de-dollarizationmay have been only in its early stages. Granted, any positive view on the Turkish lira stillhad to be tempered with some degree of caution about the underlying risks. Any proliferationof the anti-terrorism campaign to Iraq and/or renewed domestic political squabbling wouldclearly have the potential to upset markets, as would any hint of delay in global recoveryprospects.There was also the “technical” angle to consider. Despite the fact that the Turkish lira hadbeen a floating currency for only a relatively small period of time, the dollar–Turkish liraexchange rate appeared to trade increasingly technically, in line with such technical indicatorsas moving averages through September and October of 2001. Indeed, in November of 2001,dollar–Turkish lira broke down through the 55-day moving average at 1.479 million for thefirst time since the lira’s devaluation, and then formed a perfect head and shoulders pattern (seeFigure 10.1). The neckline of that head and shoulders pattern came in around 1.350 million,which was why we put out target there. Such technical indicators as RSI and slow stochasticswere also pointing lower for dollar–Turkish lira.In sum, both fundamentals, technicals and the CEMC model all seemed aligned at the time forfurther Turkish lira outperformance. Looking at the dollar–Turkish lira exchange rate throughthe signal grid, we would have come up with the results in Table 10.1. While recommendationscan be made on the basis of only one out of the four signals, they are clearly more powerful –and more likely to be right – if all four signals are in line.So what happened to our recommendation? To repeat, the aim here is not to focus overlyon the results of this specific recommendation, but rather on how a currency strategist puts arecommendation together, using the currency strategy techniques we have discussed throughoutthis book. This example is used only for the general purpose of showing how a recommendationmight be put together. As for this specific recommendation, the dollar–Turkish lira exchangerate hit our initial target of 1.35 million spot, but we decided to keep it on. Subsequently, ittraded as low as 1.296 million, before trading back above 1.3 million. With a week left to gobefore the forward contract matured, we decided to take profit on the recommendation for areturn, including carry, of +8.4%.What is important to remember from this example is not that the recommendation made sucha return – I freely admit that I have put out recommendations that have lost money. Rather, theimportant thing to remember is the discipline that was involved in putting the recommendationtogether.10.12.2 Currency HedgingFor its part, this section should be the focus of passive currency managers and corporations. Heretoo, the discipline of how one puts together a currency strategy is the same, though the purposeis different. The currency market practitioner has to form a currency view. That view cancome from the bank counterparties that the corporation or asset manager uses, but the currencymarket practitioner should also have a currency view themselves, with which to compareagainst such external views. The view itself is created from the signal grid, incorporating
Jul
Sep
Nov
Jan99
Mar
MayJul
SepNov
Source: Reuters.
Figure 10.1 Dollar–Turkish lira: head and shoulders pattern
May 98
TRL= , Close(Bid), Line10Jan02 1385000TRL= , Close(Bid), MA 5510Jan02 1478764TRL= , Close(Bid), MA 20010Jan02 1368928
Jan00
Mar
May
Jul
TRL=, Close(Bid) [Line][MA 55][MA 200] Daily
Sep
Nov
Jan01
Mar
May
Jul
Sep
Nov
Jan02
04Apr98 - 06Feb02
0.25M
0.3M
0.35M
0.4M
0.45M
0.5M
0.55M
0.6M
0.65M
0.7M
0.75M
0.8M
0.85M
0.9M
0.95M
1M
1.05M
1.1M
1.15M
1.2M
1.25M
1.3M
1.35M
1.4M
1.45M
1.5M
1.55M
1.6M
Pr1.65M
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Table 10.1 USD–TRL signal grid
Buy/sell
Currencyeconomics
Flowanalysis
Technicalanalysis
Long- termvaluation
Combinedsignal
Sell
Sell
Sell
Sell
Sell
currency economics, technicals, flow analysis and long-term valuation. The currency marketpractitioner should be aware of all these aspects of the currency to which they are exposed.Not being aware is the equivalent of not knowing the business you are in. In the example Ihave chosen, we keep the focus on emerging market currencies, this time looking at the riskposed by exposure to currency risk in the countries of Central and Eastern Europe.ExampleThe Euro has flattered to deceive on many occasions. Countless times, currency strategists inthe US, the UK and Europe have forecast a major and sustained Euro rally, and for the mostpart they have been wrong. This is not to say the Euro has not staged brief recoveries, notablyfrom its October 26, 2000 record low of 0.8228 against the US dollar, reaching at one point ashigh as 0.9595. However, such recoveries have ultimately proved unsustainable, not least withrespect to both hopes and expectations.This has been extremely important for UK, US and European corporations with factoriesor operations in Central and Eastern Europe. The reasons for this are simple – just as theEuro has been weak against the US dollar over the past two to three years, so it has also beensimultaneously weak against the currencies of Central and Eastern Europe. Indeed, there is aclose correlation between the two, not least because the Euro area receives around 70% of totalCEE exports. Equally, the Euro area is by someway the largest direct investor in CEE countries,ahead of EU accession and ultimately adopting the Euro. The pull for convergence has beenirresistible. Substantial portfolio and direct investment inflows to CEE countries, combinedwith broad Euro weakness, has meant that the Euro has weakened substantially against thelikes of the Czech koruna, Polish zloty, Slovak koruna and also the Hungarian forint, afterHungary’s de-pegging in May 2001, in the period 2000–2002.For corporations that invested in the CEE region, this has been excellent news. As the Eurohas weakened against CEE currencies, so the value of their investment has appreciated whentranslated back into Euros. More specifically, consolidation of subsidiary balance sheets withinthe group balance sheet has been favourable as the value of the Euro has declined. This raisesan obvious question – what happens if it goes up? As we saw when looking at translationrisk in Chapter 7, corporations face translation risk on the group balance sheet on the netassets (gross assets - liabilities) of their foreign subsidiary. Usually, corporations do not hedgetranslation risk given the cost, the potential for “regret” and the view that balance sheet hedgingto a certain extent negates the purpose of the original investment. However, as I have tried toshow, sustained exchange rate moves can have a significant impact on the balance sheet if nothedged. Equally, the initial investment does not negate the need to manage the balance sheetdynamically.The threat in question is that of the Euro strengthening against CEE currencies. Readersshould note that once more that is a theoretical example and I do not mean to suggest that thisis in fact a threat. Rather, readers should be considering what they might have to do were it a
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real threat. Consider then the possibility that the Euro might appreciate, perhaps significantlyagainst CEE currencies. For a corporation, this represents a balance sheet risk when translatingthe value of foreign subsidiaries’ net assets back onto the group balance sheet. It might alsorepresent transaction and economic risk as well, in terms of the threat to dividend streams andto the present value of future operating cash flows.Thus, supposing there were a real threat of significant Euro appreciation against CEE currencies, that threat would according to our signal grid have to be quantified in terms of currencyeconomics, flows, technical analysis and long-term valuation. When – and only when – all fourare aligned in the form of a BUY signal should the corporation consider strategic hedging, thatis hedging more than just immediate receivables. For the purpose of this exercise, assume thatall four are indeed aligned. Our corporation therefore has to think seriously about hedging thevarious types of currency risk associated with their investments in the CEE region.How to go about hedging? Having first decided to carry out a hedge, using the combinedsignal from a currency strategy signal grid, there are two further steps in this process. The first isto quantify the specific type and amount of risk involved. For a corporation, this means whetherwe are talking about transaction, translation or economic currency risk. The type of currencyrisk may have a significant bearing on what type of currency hedging instruments will be used.The second step in this process is to focus on the specific types of instruments involved. Forthis purpose, I have provided a shortened version of the menu of possible structures availablein Chapter 7 (see Tables 10.2 and 10.3). The corporate Treasury should get its counterpartybank to price up a menu of possible hedging strategies, which are in line with their currencyview, in order to be able to compare the costs and benefits of each strategy and arrive at thecheapest hedging strategy for the most risk hedged.The investor or asset manager will look at currency risk in a slightly different way, but forthat should still adopt the same degree of rigour in seeking to manage it. Passive currencymanagers will presumably buy the same tenor of forward or option and continue to roll thatposition, though as the value of the underlying changes so they may have to adjust their hedgesin order to avoid slippage.The line between currency trading and currency hedging blurs when it comes to activecurrency managers who trade around a currency hedging benchmark. The difference betweenthe two clearly comes down to incentive, and also to whether one is targeting absolute orrelative returns. Active currency managers also hedge currency risk, either on a rigorousbasis relative to a currency hedging benchmark or on a purely discretionary basis. Within theemerging markets, dedicated emerging market funds may have a currency overlay managerTable 10.2 Traditional hedging structuresType
Advantages
Disadvantages
Unhedged
Maintains possible yield onunderlying investmentCovered against FX risk
Speculative, reflecting a viewthat there is no or little FX riskNo flexibility, high cost ifinterest rate differentials arelarge, vulnerable tounfavourable FX movesPremium cost
Vanilla EUR forward
Vanilla EUR call option
Covered against FX risk,flexibility (does not haveto be exercised)
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Table 10.3 Enhanced (option) hedging structuresType
Advantages
Disadvantages
Seagull
Partly covered against FX risk, canbe structured as zero costDirectional and vol play
Not covered against a major FXmoveCost of the RR given interest ratedifferentials, though could bestructured to be zero costThe strike is more expensive thanthe forward and this has to bepaid if the structure isknocked-in
Risk reversalConvertible forward
Enhanced forward
Converts to a forward at an agreedrate during the tenor of thecontract, customer can takeadvantage of a contrarian movein spot up to but not includingthe KIIf the currency stays within anagreed range, the rate issignificantly improved relativeto the vanilla forward
If spot goes outside of the range,the forward rate to be paidbecomes more expensive
who hedges/trades relative to a currency hedging benchmark. On the other hand, G7 fundsthat allocate 2–3% of their portfolio to the emerging markets are unlikely to have a specificcurrency hedging benchmark for such a small allocation, and are only likely to hedge currencyrisk on a discretionary basis. The suggestion here is that both could do so more effectively andmore rigorously through the use of a signal grid and by comparing a menu of hedging structurecosts, assuming that their fund allows them to use more than just forwards.
10.13 SUMMARYThe aim of this chapter has been to bring together the core principles of currency strategy intoa coherent framework and then to apply them through practical examples to the real worldof the currency market practitioner. There are no doubt aspects of currency strategy that Ihave missed out. For instance, I did not have a chapter specifically dedicated to the emergingmarkets and how emerging market currency dynamics are specific and different from theirdeveloped market counterparts. Rather than separate the book in that way, I did attempt tooutline the emerging market angle in each chapter as a more practical way of demonstratinghow the emerging markets are different in a number of important ways. Equally, some currencystrategists run their forecasts in the form of a model currency portfolio. For leveraged funds, thisis a particularly useful benchmark of performance. It would have been useful and interestingto look at the trend in the currency market towards fewer currencies, and whether or not thatis a positive trend. Finally, it might have been instructive to look at structured products for thepurpose of hedging currency risk. Space and time have unfortunately meant that such issues willhave to wait until a second edition of this book. That said, such constraints notwithstanding,I hope the reader feels that the book has examined the topic of currency strategy, if notex