Protect Your Foreign

Investments from Currency

Risk
 Synopsis
 Modern Portfolio Theory

 Investing in Currency Markets

 Risks of International Investments

 Currency Risks

 Minimizing Currency Risk

 Modern Portfolio Theory
 Introduced by Harry Markowitz in 1952
Definition:
 A theory on how risk-averse investors can construct portfolios to optimize
or maximize expected return based on a given level of market risk,
emphasizing that risk is an inherent part of higher reward
Basic Assumption:
 Investors are essentially risk averse & would opt for less risky assets
Basic Concept:
 World's markets do not move in lockstep
 By mixing asset classes with low correlation to one another in appropriate
proportions, risk can be reduced at the portfolio level, despite presence of
volatile underlying securities 
 Correlation coefficients range between -1 & +1
Risks to Returns indicated by MPT:
 Systematic Risk
 Unsystematic Risk
 Investing in Currency Market
 There are several reasons of investing in the
currency market:
 Portfolio Diversification
 Longer Trends
 Higher Liquidity

 Ways to invest in Currency Markets:

 By setting up own accounts
 Access currency investments through forex brokers
 Through ETFs or funds
 Currency Trading Margin
 Refers to the deposit that is put into the
account of the currency trader

 Allows a trader to trade global currencies with

borrowed money

 Gives the trader a greater opportunity to

make more money

Foreign ETFs
Broad-based Foreign ETFs – Eg. DGT – the SPDR Global Titans ETF

 Emerging Market ETFs – Eg. ADRE – the BLDRS Emerging Markets 50 ADR Index ETF

 Developed Country ETFs – Eg. PDN – the PowerShares FTSE RAFI Developed Markets

 BRIC ETFs - Eg. EEB – the Claymore / BNY Mellon BRIC ETF

 Regional ETFs – Eg. ILF - iShares S&P Latin America 40 Index ETF

 Individual Country ETFs - FXI - iShares FTSE/Xinhua China 25 Index ETF

 Foreign Currency ETFs - FXA – the Currency Shares Australian Dollar Trust 

 International Bond ETFs - SPDR Barclays Capital International Treasury Bond ETF

 Foreign Style ETFs- SCZ – the iShares MSCI EAFE Small Cap Index ETF

 Foreign Dividend ETFs -  DND – the WisdomTree Pacific ex-Japan Total Dividend ETF

 Foreign Inverse ETFs - EWV – the UltraShort MSCI Japan ProShares ETF

 International Real Estate ETFs - RWX – the SPDR Dow Jones International Real Estate ETF

 Commodity & Industry ETFs – PKOL - The PowerShares Global Coal ETF
 Risks of International
Investments
Portfolio Risk

Taxation

Currency Risk
Currency Risk
 Currency Risk
 Transactional Risk
- Essentially cash flow risks

 Translational Risk
- Deals with exposure represented by foreign investment &
debt structure
- Results from consolidation of groups & subsidiary balance
sheets

 Economic Risk
- Overall measure of the currency risk
- Focus is on present value of future operating cash flows &
how this present value in base currency changes a result of
changes in exchange rates
 Minimizing Short Term Currency
Risk
 Forward Contracts

 Futures Contract

 Money Market Hedge

 Options

 Cross Hedging
 Minimizing Long Term Currency
Risk

Back-to-back loans

Currency Swaps/Credit Swaps