MIS 4500 Lecture Notes - Foreign Exchange Risk, Standard Deviation, Chapter 27

• School: University of Manitoba
• Department: Management Info. Systems
• Course: MIS 4500
• Professor: Pourang Irani

Document Summary

Traditional case: risk reduction (from low correlation) and superior expected returns. 2 1 deviation of return: p = w1. Currency: return in $: r$ = r + s + (r x s); r is return in local currency and s is exchange rate movement; cross product usually ignored. 2 is the variance of foreign asset in $; 2 is variance in local currency; s product); f variance of exchange rate; and is correlation of local currency asset return and exchange rate movement. 2 is: contribution of currency risk is the difference between the combined standard deviation and the local currency equity return standard deviation. Returns: int"l investing increases sharpe ratios (both numerator and denominator effects: consider active vs. passive; costs and benefits of both. Optimization must be based on forward-looking / expected returns: real growth; economic flexibility: forecasts may already be reflected in asset prices.