RE: Portfolio Construction; hedging
Hey,
Let's say i owned a European company traded on the NYSE, how could I, effectively, hedge out the currency exposure to own the company in dollars?
Would convexity be considered, here? I.E., the hedging will not be on a one-for-one basis?
Regards.
you sell the foreign currency of the company fwd vs the $. that way you remove currency exposure. you're not using bonds so convexity doesnt apply.
One to one hedging does not necessarily apply as there are two sources of currency risk in the equation one is the monetary value hedging (i.e. the hedging of the actual market value and dividends) the second type of hedge that you have to look at is the actual company operations and ask yourself if Xrates change are the sales or cogs of the company affected? if so then you have two sources of exposure to currency risk and have to also take this exposure into consideration. So in a nutshell it 1 to 1 hedging depends on the degree of exposure to the currency you are looking to hedge.
Hope this helps!
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