Algorithms for Worst-Case Design and Applications to Risk Management

By Berç Rustem; Melendres Howe | Go to book overview

Chapter 11
Robust currency management

In this chapter we discuss currency management. We consider the strategic point of view where a currency benchmark is identified. We also consider the tactical point of view where the frequent re-balancing of a portfolio's currency hedge is managed in order for the portfolio to benefit from short- and mediumterm currency fluctuations. Currency benchmark identification is important in finding the long-term optimal hedge ratio that a portfolio should adopt in order to minimize the negative impact of any currency depreciation in the medium and long term. We discuss benchmark identification, first, for a pure currency portfolio as this simplifies and clarifies the role of strategic currency management, and second, for an international asset portfolio as this clarifies the use of currency hedging as a tool for managing the currency exposure of such a portfolio. The tactical management of a currency portfolio involves currency trades that cause fluctuations about the strategic benchmark. These trades represent short- to medium-term adjustments to the optimal hedge ratio in order to maximize returns and accumulate short-term gains. We consider both the strategic and tactical formulations.


1 INTRODUCTION

The financial modeling of the behavior of currencies has gained attention as portfolios become increasingly international. Currency modeling has been a major focus of research as more and more market participants realize the impact of currencies on the value of their portfolios. By investing in the equity market of a foreign country, a portfolio manager not only receives local market returns but also the currency return associated with a foreign currency-denominated equity market. The manager needs to appraise the local equity market to judge whether the investment is worth the risk. Additionally, she needs to appraise the potential performance of the foreign currency to judge whether the exposure to that foreign currency would yield a desirable return. A positive appraisal of the currency may motivate her to maintain the exposure to that foreign currency whereas a negative appraisal may cause her to hedge the currency risk (see CN 1). Local market forecasting and currency forecasting become essential in this appraisal process. The

-341-

Notes for this page

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this book

This book has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this book

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this page

Cited page

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited page

Bookmark this page
Algorithms for Worst-Case Design and Applications to Risk Management
Table of contents

Table of contents

  • Title Page *
  • Algorithms for Worst-Case Design and Applications to Risk Management *
  • Contents vii
  • Preface xiii
  • Chapter 1 - Introduction to Minimax 1
  • References 17
  • Comments and Notes *
  • Chapter 2 - A Survey of Continuous Minimax Algorithms 23
  • References *
  • Comments and Notes *
  • Chapter 3 - Algorithms for Computing Saddle Points 37
  • References *
  • Comments and Notes *
  • Chapter 4 - A Quasi-Newton Algorithm for Continuous Minimax 63
  • References *
  • Appendix A - Implementation Issues *
  • Appendix B - Motivation for the Search Direction D̄ *
  • Comments and Notes *
  • Chapter 5 - Numerical Experiments with Continuous Minimax Algorithms 93
  • References 119
  • Chapter 6 - Minimax as a Robust Strategy for Discrete Rival Scenarios 121
  • References *
  • Chapter 7 - Discrete Minimax Algorithm for Equality and Inequality Constrained Models 139
  • References *
  • Chapter 8 - A Continuous Minimax Strategy for Options Hedging 179
  • References *
  • Appendix A - Weighting Hedge Recommendations, Variant B* *
  • Appendix B - Numerical Examples 237
  • Comments and Notes 244
  • Chapter 9 - Minimax and Asset Allocation Problems 247
  • References *
  • Comments and Notes *
  • Chapter 10 - Asset/liability Management under Uncertainty 291
  • References *
  • Comments and Notes *
  • Chapter 11 - Robust Currency Management 341
  • References *
  • Appendix - Currency Forecasting *
  • Comments and Notes *
  • Index 381
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this book

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
/ 389

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.