Currency Overlay BY Neil Record

Currency Overlay BY Neil Record
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Currency Overlay

BY Neil Record


Adobe E-Book 316 pages February 2004


Currency overlay is the management of the currency exposure inherent in cross-border institutional investments. Exposure to foreign currencies increases the volatility of their returns, without increasing the returns themselves and academics and consultants recommended that the currency exposure should be stripped out of international portfolios and eliminated as far as practicable. This book provides a comprehensive description of currency overlay, its history and possible future developments and growth, the reason for its emergence, the debates and controversies, the different styles of currency management, and the industry's performance track record. This is a subject of international appeal and is an area of particular growth potential for institutional investors. Coverage includes:

The theoretical case for eliminating currency risk in international portfolios

The interplay between asset returns and currency returns, and the effect of this on hedging decisions

Benchmarks - their construction and strategic role

Least-cost passive overlay

The structure of the currency market, and its 'inefficiencies'

Active overlay styles

Active overlay both restricted and unrestricted (currency alpha)

Uses diagrams, charts, tables and explanatory boxes to explain concepts


List of boxes. Biography.


1. Introduction.

2. The Problem.

3. Currency Hedging.

4. Foreign Exchange Market ĘC History and Structure.

5. Theory of Currency Hedging of International Portfolios.

6. Passive Currency Overlay.

7. Currency Overlay Benchmarks.

8. Overlaying Different Asset Classes.

9. Is the Currency Market Efficient?

10. Active Currency Overlay ĘC Management Styles.

11. Active Currency Overlay ĘC Evidence of Performance.

12. Implementing Currency Overlay.

13. Looking Ahead.

References/Useful Reading.

Appendix 1. Boundary Conditions for Forward Arbitrage.

Appendix 2. Lognormal Returns.

Appendix 3. AIMR® Report.

Appendix 4. Sample Investment Guidelines.



NEIL RECORD has spent the majority of his working life as a currency overlay manager. He was educated at Oxford and London Universities, and early in his career worked in the Bank of England as an Economist. In 1983, he founded Record Currency (formerly Treasury) Management, the firm he has Chaired and guided for twenty years. The author has been in the forefront of the development of currency overlay since its inception, and is acknowledged as one of the leading figures in the overlay industry. He has authored numerous articles on currency and related topics, and is an external MBA lecturer at the Judge Institute at Cambridge.