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This volume examines managed currencies and the place of this type of investment in strategies targeting positive absolute returns in all market environments and in delivering stability and efficiency to all investors.
It begins with an overview of the foreign exchange market. It then moves on to discuss the intricacies of the management of currencies as an investment vehicle. Alternative Investments: Managed Currencies examines all major issues including:
- the market and market inefficiency;
- the currency risk problematic;
- hedging and currency risk management;
- currency as an asset class;
- managed currencies;
- diversification;
- trading styles and analysis;
- fees;
- guaranteed products;
- the impact of the euro.
Detailed yet practical, written by a leading practitioner and illustrated with case studies, this book is an essential report for all investors seeking to maximise their portfolio’s returns.
Table of Contents
Contents
Foreword 9
Preface 11
Chapter 1 General features and statistics of the FX market 13
Chapter 2 Factors influencing foreign exchange rates 19
The balance of payments 19
Purchasing power parity 20
Inflation 21
GDP and economic growth 22
Fiscal policy and growth 23
Monetary policy 23
Interest rates 24
Technical analysis 25
Market expectations 27
Market sentiment 28
Market positioning 28
Chapter 3 The workings of FX markets 33
Market participants 33
Central banks 33
Commercial, investment and merchant banks 34
Brokers 34
Investment funds 35
Corporates 35
Foreign exchange trading and execution 35
Description of an electronic broking system 37
Regulation, taxation and accounting issues 38
Market regulation 38
Accounting and tax considerations 40
Chapter 4 Currency investing and currency risks 41
An inefficient market? 41
Foreign investment and currency risk 43
Chapter 5 Currency overlay 55
Introduction 55
The strategic benchmark 57
The currency management style 61
Passive currency management 61
Matched hedging 62
Basket hedging 62
Hybrid approaches 67
Option replication programmes 67
Active currency management 69
In-house management versus outsourcing? 70
Chapter 6 Currency as an asset class 73
The rationale behind currency investing 73
Managing currencies: a sector analysis 77
Trading styles 78
Market risk 85
Time horizon 87
Managed currencies and fees 88
Chapter 7 Performance measurement, benchmarks and trading style analysis 89
The Tass Currency Index 91
The Parker FX Index 92
The AFX 93
Which benchmark? 95
Trading style analysis in the FX markets 98
References 103
Authors
Pierre Lequeux, aged 38, joined ABN AMRO Asset Management London in June 1999 as senior quantitative currency manager. His main role is develop and implement the in house quantitative currency overlay programme. The currency process developed is now dedicated to manage the currency risks undertaken by many of the fixed-income funds managed by ABN AMRO Asset Management.
Previously, he was head of quantitative research and trading desk at Banque Nationale de Paris, London branch, which he joined in 1987. His role was then mainly centred on the modelling of FX markets and proprietary trading. He is mostly active in the research and design of trading models and portfolio risk management techniques. Pierre is a graduate in international trade and holds a diploma of the Forex Association. He is also an associate researcher at the Centre for International Banking and Finance of Liverpool Business School.
He is an active contributor to academic and practitioner conferences and a member of the editorial board of Derivative Use, Trading & Regulation as well as a member of the Alternative Investment Management Association.
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