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 aid16 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.
Introduction -- 1: Investor behaviour and portfolio diversification -- 1.1: Introduction -- 1.2: International parity conditions -- 1.3: Mean-variance portfolio analysis and the capital asset pricing model -- 1.4: The intertemporal capital asset pricing model -- 2: 'Universal' hedging against currency risk -- 2.1: Introduction -- 2.2: The case against universal hedging -- 3: Universal regression hedging -- 3.1: Introduction -- 4: Demands for index bonds -- 4.1: Introduction -- 5: Optimal asset allocation with index bonds and currency risk hedging -- Conclusion.