Abstract: Using a novel, hand-collected, dataset of currency forward positions we undertake the first comprehensive investigation into currency management at U.S. international equity mutual funds. While funds actively manage currency exposure via currency overlay, we find funds more commonly construct separate currency portfolios of long and short derivative positions, often involving currencies not in the underlying equity portfolio. Across the industry we find, however, that both approaches have limited impact on investment performance, which we ascribe to sub-optimal use of currency forwards. Moreover, we find substantial investment gains could have been achieved among non-users of currency derivatives through dynamic currency hedging.
Discussant: Saurin Patel, University of Western Ontario
Abstract: This paper shows that US presidential cycles can predict dollar-based exchange rate returns. Armed with nearly 40 years of data and a large cross-section of currency pairs, we document an average US dollar appreciation during Democratic presidential terms and an average US dollar depreciation during Republican presidential mandates. The difference in these average exchange rate returns is larger than 5% per annum and is primarily linked to trade tariffs. In contrast, we find no relationship with cross-country interest rate differentials, inflation differentials, and pre-existing economic conditions. We relate these findings to trade policy within a model of exchange rate determination with constrained financiers.
Abstract: Globally-focused firms, more than domestic ones, are the key drivers of foreign
exchange rate (FX) risk. They explain a larger fraction of the factors’ variation and
have higher FX exposure, specifically during the home currency depreciation. Their
exposure is higher in countries more dependent on the export sector but decreases
with centrality in the trade network, reflecting benefits from geographically diversified
foreign activities. Exposure is relatively larger to neighbors’ currencies, in line with
gravity effects, and to the currencies of the most distant countries, across the distinct
FX factors. Overall, we find the economic origins of FX risk pricing captured by trade
rather than investments.
Discussant: Valeri Sokolovski, University of Alberta
