- Apr 17, 2025
- Intelligent trading
In the field of global stock investment, investors face a variety of risks, among which foreign exchange risk is one of the important factors affecting investment returns. How to manage foreign exchange exposure has become a key issue that global stock investors need to solve. Compared with simple hedging or unhedging strategies, the strategy of adjusting currency exposure according to expected currency returns can play an important role in optimizing the risk-return characteristics of the portfolio. The HSAM platform develops scientific foreign exchange exposure management strategies for investors by deeply studying the linkage between the foreign exchange market and the stock market.
Foreign exchange exposure in global stock investment stems from investors investing in stock assets denominated in non-local currencies. When the exchange rate changes, it will affect investment returns. For example, an American investor invests in European stocks. When the euro appreciates against the US dollar, the investor can not only obtain the benefits brought by the increase in stock prices, but also obtain additional benefits brought by exchange rate changes; conversely, when the euro depreciates against the US dollar, the exchange rate changes will offset part of the stock investment returns. Therefore, it is crucial for global stock investors to reasonably manage foreign exchange exposure.
When analyzing foreign exchange exposure management strategies, the HSAM platform focuses on the impact of interest rate differences in different countries on currency returns. According to the interest rate parity theory, currencies of countries with higher interest rates usually experience a discount in the forward market, while currencies of countries with lower interest rates experience a premium. Based on this principle, when investors invest in stocks of high-interest countries in low-interest countries, in order to capture the foreign exchange rate premium, they should consider actively hedging currency risk. For example, Japanese investors invest in Australian stocks. Due to the relatively high interest rates in Australia, the yen may experience a discount against the Australian dollar in the forward market. By hedging the exchange rate risk of the Australian dollar against the Japanese yen, Japanese investors can lock in the returns of Australian dollar assets and obtain interest rate differential income.
On the contrary, when investors invest in stocks of low-interest countries in high-interest countries, they may benefit from not hedging their currency risk exposure. For example, when American investors invest in Swiss stocks, due to the low interest rates in Switzerland, the US dollar may experience a premium against the Swiss franc in the forward market. If American investors do not hedge currency risk, they will obtain additional exchange rate benefits when the Swiss franc appreciates. However, this strategy is also accompanied by certain risks. When the exchange rate moves in the opposite direction of expectations, it may lead to a significant decline in investment returns.
When formulating foreign exchange exposure management strategies, the HSAM platform will also take into account a variety of factors, such as the macroeconomic environment, monetary policy trends, and market volatility. In terms of the macroeconomic environment, currencies of countries with strong economic growth usually have appreciation potential, while currencies of countries with economic recessions may face depreciation pressure. Adjustments in monetary policy, such as interest rate hikes or cuts, will also have an important impact on exchange rates. In addition, changes in market volatility will affect hedging costs and potential returns. The platform establishes a model to conduct a comprehensive analysis of these factors, provide investors with personalized foreign exchange exposure management advice, and help investors achieve a balance between risk and return in global stock investments.