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The Journal of Portfolio Management

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Primary Article

A Scenario-Based Approach to Optimal Currency Overlay

Antonio Marcos Duarte and Ram Rajagopal
The Journal of Portfolio Management Summer 1999, 25 (4) 51-59; DOI: https://doi.org/10.3905/jpm.1999.319758
Antonio Marcos Duarte Jr
Managing director of risk management at UNIBANCO S.A. in Brazil and a lecturer at Federal University of Rio de Janeiro.
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Ram Rajagopal
Professor at the Federal University of Rio de Janeiro.
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Abstract

Currency risk is a measure of a portfolio's potential losses due to changes in the relative value securities denominated in different currencies. Currency risk can be minimized using hedging techniques. The optimal currency overlay techniques proposed in the finance literature are based on Markowitz's mean-variance framework, which has shortcomings for both general asset allocation problems and currency hedging. Practitioners have begun to adopt scenario-based methodologies for asset allocation as a substitute for the mean-variance framework. This article presents a scenario-based approach for the optimal currency overlay. Three numerical examples illustrate its practical use and show that the choice of a loss function can produce quite different optimal currency allocations.

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The Journal of Portfolio Management
Vol. 25, Issue 4
Summer 1999
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A Scenario-Based Approach to Optimal Currency Overlay
Antonio Marcos Duarte, Ram Rajagopal
The Journal of Portfolio Management Jul 1999, 25 (4) 51-59; DOI: 10.3905/jpm.1999.319758

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A Scenario-Based Approach to Optimal Currency Overlay
Antonio Marcos Duarte, Ram Rajagopal
The Journal of Portfolio Management Jul 1999, 25 (4) 51-59; DOI: 10.3905/jpm.1999.319758
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