International Business 303: Strategies for Hedging Currency Risk

This report, prepared for International Business 303, delves into the critical topic of hedging strategies in the context of international finance. The report begins by defining hedging as a risk management tool used by organizations and investors to mitigate market exposure. It summarizes an article that examines systematic foreign exchange hedging for multicurrency portfolios using genetic algorithms, focusing on the impact of hedging on portfolio performance and currency hedging costs. The analysis highlights the importance of hedging in managing currency volatility, particularly in light of central bank policies and market events like Brexit. Key terms discussed include hedging provisions, conversion rates, and the role of derivatives such as options and futures. The report emphasizes the need for hedging to protect investments from currency fluctuations, especially given the increasing international exposure of asset managers. The conclusion underscores the dilemma faced by fund managers in deciding whether to hedge in a volatile currency market. References include articles from Seeking Alpha, Bloomberg, and Reuters, supporting the analysis of currency risk and hedging practices.

Running head: INTERNATIONAL BUSINESS 303
International Business 303
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Definition of the Topic:..............................................................................................................2
Summary of the Article:.............................................................................................................2
Discussion of the key terms of the article:.................................................................................3
Reference and Bibliography:......................................................................................................5

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Definition of the Topic:
Hedging is mainly identified, as the overall provision, which is used by organisation
sand investors to hedge their risk exposure in the market. The overall evaluation of hedging
measure and its impact on performance of the portfolio could be identified.
Summary of the Article:
In addition, the article analysed in the section mainly evaluates “Systematic Foreign
Exchange Hedger for Multicurrency Portfolios using Genetic Algorithms”. The article mainly
evaluates the impact of current hedging on portfolio by using the static hedging measure. In
addition, article evaluates the currency hedging costs, which is mainly conducted by the
investors for improving the level of returns from investment. Moreover, the volatility spur is
mainly reduced by the funds mangers by utilising the currency hedging measures. The article
mainly helps in understanding the need for currency hedging by funds management who have
invested adequately in different economies and countries. Furthermore, the article also states
that the easing policy used by central bank in major economies have led to the increment in
volatility of currencies, which is mainly mitigated by utilising the different hedging measures.
The article also indicates the extensive usage of hedging measure that is been conducted by
asset management for minimising the negative impact from market risk (Reuters.com, 2018).
Hedging is mainly an adequate measure which is used by investor to curb the
volatility in the capital market and save guard their portfolio against the negative price
actions. Moreover, the hedging measure can be conducted with the help of different
derivative instruments such as options, futures, and swaps, as it requires low capital blockage
and reduces risk exposure of the traders. The article also indicates that asset managers is have
increased their exposure in the international market in form of equity and bond investment,

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while the increment in currency volatility directly affects its capability to generate high rate
of return from investment. Moreover, the article also evaluates the impact of Brexit on the
currency valuation of both British Sterling, Euro and USD. The changes in currency
valuation is directly affected by the decisions made by governments (Reuters.com, 2018).
Discussion of the key terms of the article:
The article is relevantly evaluated based on selected chapter, where hedging fund
managers are conducting both hedging and conversions of currency to generate high rate of
returns from investment. The article mainly evaluates the need to hedging measures, as
depicted in the chapter, which directly allows the investor to minimise the negative impact
from adverse price action. Hedging measure is mainly used by investors, where the hedging
measure protects the investor from unexpected fluctuations in the exchange rates. The
measure also helps in minimising the level of risk projection that could be provided from
capital market. The conversion rates are the main valuation in change one currency is bought
and sold in the FX market, which helps in commencing the international trade smoothly
(Alvarez-Díez, Alfaro-Cid & Fernandez-Blanco, 2016).
The selected chapter mainly evaluates the impact of conversion rates to determine the
currency valuation of different countries. In addition, the article indicates the change in
currency conversion rate, which is forcing the fund managers to increase the level of risk
from investment. The article also indicates that the change in easement policy used by central
banks in Europe, America, and UK also altered the overall conversion rate of international
currency. In addition, the decision made by the British government regarding the Brexit also
altered the overall conversion rates of GBP against EURO and USD. Furthermore, the
conversion rate also helps detecting the losses, which could incur due to the volatility in the
currency market (Indawan et al., 2015).

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The second measure discussed in the chapter is hedging provisions, which is used by
investors to minimise the negative impact from volatile currency market. In addition, the
chapter relevantly discusses about the losses, which could incur due to the fluctuations in the
currency exchange rate. In addition, the changes in global conditions is relatively hampering
the overall conversions rates. Moreover, the article indicates the problems faced by
international investors in protecting their funds against the negative impact from price
fluctuations. In addition, the fund managers are using hedging provision for minimising the
negative impact of currency volatility and maintaining the level of returns from investment.
The article also indicates that with the hedging provisions the asset managers can minimises
the negative impact of currency valuation and generate high rate of returns from investment
(Alvarez-Díez, Alfaro-Cid & Fernandez-Blanco, 2016).
The evaluation of both article and chapter mainly helps in detecting the overall need
of hedging measure by funds manager to mitigate the volatility in the curreny market. The
changing prices in the international front is directly affecting portfolio valuation of fund
managers, which can only be controlled with the help of adequate hedging tools. The article
indicates the main dilemma of the fund managers, whether to hedge or not to hedge in this
highly volatile currency market.

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Reference and Bibliography:
Álvarez-Díez, S., Alfaro-Cid, E., & Fernández-Blanco, M. O. (2016). Hedging foreign
exchange rate risk: Multi-currency diversification. European Journal of Management
and Business Economics, 25(1), 2-7.
Berman, N. (2017). Up For Debate: Currency-Hedging Costs - The Threat To Bond
Markets. Seeking Alpha. Retrieved 30 April 2018, from
https://seekingalpha.com/article/4114220-debate-currency-hedging-costs-threat-bond-
markets
Denning, M. (2018). It's Already Time to Start Thinking About Oil in 2019. Bloomberg.com.
Retrieved 30 April 2018, from https://www.bloomberg.com/gadfly/articles/2018-01-
11/oil-prices-2019-e-p-firms-seem-to-be-hedging-already
Indawan, F., Fitriani, S., Karlina, I., & Grace, M. V. (2015). The Role of CuRRenCy hedging
on fiRm PeRfoRmanCe: a Panel daTa evidenCe in indonesia. Bulletin of Monetary
Economics and Banking, 17(3), 279-298.
Reuters.com. (2018). U.S.. Retrieved 30 April 2018, from
https://www.reuters.com/article/uk-currencies-hedging-analysis/market-volatility-
spurs-some-funds-to-look-again-at-currency-hedging-idUSKBN1FQ1TT