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Optimal Currency Strategy for a Global Balanced Portfolio from a Swiss Investor’s Perspective

Master's Thesis
Corporate Partner: 
Zürcher Kantonalbank
Date Published: 
November 21, 2013

This paper examines the benefits from hedging the currency risk of international investments in a balanced portfolio consisting of bonds, equities, and commodities from the viewpoint of a Swiss investor over the period from 1997 to 2013. The appreciation of the Swiss Franc in recent years has increased the currency risk associated with international investments. By means of the minimum-variance hedging approach the optimal risk minimizing hedge ratios were calculated applying a rolling window over five years to compute parameter estimates. Over the sample period, the hedging of currency exposure on a monthly basis reduced the volatility in aforementioned portfolio substantially. In line with previous studies, the paper finds that when bond portfolios are regarded solely, full hedging is the optimal strategy with respect to the minimization of risk. However, in the portfolio context this finding cannot be supported due to the coherences of the different asset classes. Our findings imply that in the portfolio context the optimal hedge ratios differ from the optimal single asset hedge ratios and hence this should be taken into account when deciding about optimal hedging strategies on a portfolio basis.