OPTIMAL ASSET ALLOCATION AND CURRENCY HEDGING

Major objectives of an investor are to minimize risk §and maximize expected portfolio returns. §International diversification is a natural means to §these ends. We extend the search into the §area of currency hedging, investigating the theory §of demand for index bonds and its role in hedging §risky assets against currency risks for a given §market portfolio when equity is not hedged against §inflation risk. The major conclusions are: Introducing index bond into the analysis we §have expanded the investor s opportunity set with a §real asset. Clarifying the meaning of and relation §among various Universal Hedging Ratios that have §previously appeared in the literature. Explicitly identifies the necessary §conditions under which investors follow a common §currency hedging strategy and constructs a single §performance evaluation benchmark for international §portfolios, irrespective of the national identity of §the investor, in the presence of index bonds.§This book will be an aid to International §Portfolio Managers and Financial Managers. This book §can also be used as a resource for post-graduate §courses in International Finance and Risk Management.