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Article

The New Neutral: The Long-Term Case for Currency Hedging

Robert Bush and Abby Woodham
The Journal of Investing Summer 2018, joi.2018.1.068; DOI: https://doi.org/10.3905/joi.2018.1.068
Robert Bush
is director and ETF strategist at DWS in New York, NY
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Abby Woodham
is vice president and ETF strategist at DWS in New York, NY
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Abstract

The foreign exchange component of international equity investing is key to the experience that investors will have when they buy assets in denominations other than their base currency. Indeed a traditional, un-hedged international investment, with full foreign currency exposure, can in fact be thought of as a long position, of equal magnitude, in both the foreign equity and the foreign currency. In this paper, the authors use traditional portfolio metrics to address the question of whether exposure to foreign currency is likely to help, or hinder, investors over the long run. They argue that the portfolio approach is a helpful, but underutilized, framework that requires the careful consideration of six elements; the returns of equities and currencies, their risks, the correlation between equity and currency, and the costs to hedge. The authors find that, under certain empirically justified assumptions, currency is rarely sufficiently negatively correlated to justify its place in strategic international allocations. They conclude that the “New Neutral” for long-term international investors should be to remove foreign currency exposure from their portfolios.

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The New Neutral: The Long-Term Case for Currency Hedging
Robert Bush, Abby Woodham
The Journal of Investing May 2018, joi.2018.1.068; DOI: 10.3905/joi.2018.1.068

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The New Neutral: The Long-Term Case for Currency Hedging
Robert Bush, Abby Woodham
The Journal of Investing May 2018, joi.2018.1.068; DOI: 10.3905/joi.2018.1.068
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  • Article
    • Abstract
    • LITERATURE REVIEW
    • EQUITY AND CURRENCY RETURNS
    • CORRELATION
    • BRINGING IT TOGETHER: A FRAMEWORK FOR THE CURRENCY HEDGING DECISION
    • REFERENCES
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