Foreign Currency Exposure within Country Exchange Traded Funds

2015 ◽  
Vol 1 (0) ◽  
pp. 28
Author(s):  
S. Owen Williams
Keyword(s):  
Foreign Currency ◽  
Exchange Traded Funds ◽  
Currency Exposure

Foreign currency exposure within country exchange traded funds

2016 ◽  
Vol 33 (2) ◽  
pp. 222-243 ◽  
Author(s):  
Owen Williams
Keyword(s):  
Exchange Rate ◽  
Foreign Currency ◽  
Tracking Error ◽  
Exchange Traded Funds ◽  
Currency Risk ◽  
Content Type ◽  
Currency Exposure ◽  
The Exchange Rate ◽  
Sharpe Ratios ◽  
The Impact

Purpose The purpose of this paper is to consider the implicit effect of the underlying foreign currency exposure on the performance characteristics of country exchange traded funds. Design/methodology/approach To arrive at an overall estimation of the exchange-traded fund (ETF)’s tracking error, the mean of the three measures of tracking error was calculated for both the hedged (r_LC) and unhedged (r_NAV) return series. Since tracking error does not capture all the risk inherent in a country index fund, the study extends the analysis using the Sortino and Modified Sharpe ratios. Findings The decision to hedge currency risk should not be taken on the sole basis of historical volatilities. The investor must also factor in transactions costs, the possible roll of futures contracts and prevailing interest rate differentials. If the rate on the foreign currency is greater than the dollar (euro) rate, the investor will pay for the hedge. If the rate on the foreign currency is less than the dollar (euro) rate, the investor will gain on the trade. Given that hedging entails additional costs, in cases where the neutralization of currency volatility only reduces risk modestly, it would be advisable to leave the exchange rate risk unhedged. We propose two metrics for ETF investors deciding whether to hedge a country ETF’s underlying currency risk. Originality/value The results highlight a key finding: while the majority of country funds accurately track the performance of the underlying foreign index when measured in the local currency, returns in the fund currency can be much more volatile. In breaking down the sources of country fund volatility, the paper demonstrates the impact of the underlying currency movements on overall fund risk. In cases where the currency impact has a significant impact on fund tracking errors, an index-oriented investor benefits from neutralizing the exchange rate effect. Additionally, as the Sortino and Modified Sharpe measures suggest that the underlying currency exposure offers in most cases a better risk-adjusted return for country exchange-traded funds (ETFs) in the listing currency, we also calculate the risk minimizing foreign currency exposure for each fund and propose a decision rule based on the net currency variance to decide whether to hedge the ETF’s currency risk. The optimal hedge ratio indicates that US-based investors should only partially hedge the underlying currency risk while European-based investors are better off fully hedging currency risk.

An Exposition on Foreign Currency Exposure

2014 ◽  
Author(s):  
Prabakaran Sellamuthu ◽  
J.P. Singh
Keyword(s):  
Foreign Currency ◽  
Currency Exposure

MOTIVES FOR CORPORATE HEDGING: EVIDENCE FROM THE UK

2005 ◽  
Vol 01 (01) ◽  
pp. 0550003 ◽  
Author(s):  
EPHRAIM CLARK ◽  
AMRIT JUDGE
Keyword(s):  
Risk Management ◽  
Financial Distress ◽  
Economies Of Scale ◽  
Foreign Currency ◽  
Annual Reports ◽  
Data Sets ◽  
Growth Options ◽  
Corporate Hedging ◽  
Currency Exposure ◽  
The Uk

In this paper, we use survey data and data from annual reports to identify the determinants of hedging activity of United Kingdom (UK) firms in the context of an overall program of risk management. Comparing the two sets of data makes it possible to identify misclassified firms, that is, firms whose hedging claims are not consistent across the two data sets. Our results on the consistent data show that the likelihood of hedging is related to growth options, foreign currency exposure, liquidity and economies of scale in hedging costs. Contrary to many previous US studies, we also find strong evidence linking the decision to hedge and the expected costs of financial distress. Results for the misclassified firms suggest that they are actually hedgers that hedge less extensively than the correctly classified (CC) hedgers.

Why hedge currency exposure with foreign currency debt?

2013 ◽  
Vol 26 (2) ◽  
pp. 258-289 ◽  
Author(s):  
Milagros Vivel‐Búa ◽  
Luis Otero‐González ◽  
Sara Fernández‐López ◽  
Pablo Durán‐Santomil
Keyword(s):  
Foreign Currency ◽  
Currency Exposure ◽  
Foreign Currency Debt

Foreign Currency Exposure and Hedging Practices: New Evidence from Emerging Market of ASEAN-4

2017 ◽  
Vol 23 (5) ◽  
pp. 4939-4943 ◽  
Author(s):  
Hishamuddin Abdul Wahab ◽  
Muhammad ‘Afif Amir Husin ◽  
Norazmir Mohd Nordin ◽  
Yumn Suhaylah Yusoff ◽  
Wan Nur Rahinie Aznie Zainudin
Keyword(s):  
Foreign Currency ◽  
Emerging Market ◽  
Currency Exposure ◽  
New Evidence

scholarly journals Foreign Currency Exposure and Hedging: Evidence from Foreign Acquisitions

2013 ◽  
Vol 03 (02) ◽  
pp. 1350010 ◽  
Author(s):  
Söhnke M. Bartram ◽  
Natasha Burns ◽  
Jean Helwege
Keyword(s):  
Exchange Rate ◽  
Foreign Currency ◽  
Securities And Exchange Commission ◽  
Foreign Companies ◽  
Foreign Acquisitions ◽  
Currency Derivatives ◽  
Currency Exposure ◽  
Foreign Operations ◽  
The Exchange Rate ◽  
Using Data

We study the exchange rate exposures of a sample of firms that undertake large acquisitions of foreign companies. Using data from Securities and Exchange Commission (SEC) filings on their foreign operations and derivatives usage, we examine how the exposures change from before to after the acquisition. We find that these deals generally lead to reduced currency exposure, which reflects the fact that most of the firms already have business in the target's country and the mergers serve as operational hedges. In contrast, we do not find a statistically significant effect for hedging with currency derivatives despite the fact that many of the firms in the sample use such instruments.

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