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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | Currency Hedging Strategies for Bond Portfolios |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 55 |
| Date | 2023 |
| Abstract Text | This thesis analyses the impact of currency hedging on international bond portfolios from the point of view of a Swiss investor. Four of the most important regions including their currency were included in this analysis, namely the US Dollar, Euro, Pound Sterling, and Japanese Yen. The focus of the thesis is on the mitigation of risk stemming from the currency exposure and the comparison of different hedging approaches. The leading question of this thesis is whether a Cash-Flow-Matched hedging approach is superior to the benchmark used by most index providers or to no hedging at all. All hedging approaches use currency forward contracts as hedging instruments. The results show that the benchmark is the best hedging method among these three. Superiority is not only shown in terms of the mean return but also in terms of higher moments. The monthly structure of hedging and reporting forms the base of the success. The results are robust across all regions and bond-maturity buckets, showing that currency hedging is absolutely crucial in the setting of international bond portfolios. Additionally, more active hedging strategies were carefully introduced and compared to the three main approaches. An effort was undertaken to stay as close as possible to the philosophy of risk management. Overall, the results are less robust, pointing towards a slightly speculative nature of the introduced hedging strategies. Nonetheless, promising results were reported with rather simple quantitative trading rules, especially for the US region. A simple momentum approach is superior to all other approaches in terms of mean return. The development of the currency exchange rates including the recent turbulence underlines the importance of currency hedging. Throughout the considered period, the Swiss Franc was very strong compared to the currencies of the other regions, generally playing in the favour of hedging. The analysis is strongly affected by the point of view as well, which is tailored to an institutional Swiss investor such as a Swiss pension fund. |
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