True Costs of Currency Hedging Far Outweigh Benefits
Larry MacDonald (from Canadian Business magazine and The Globe and Mail) wrote an excellent article indicating that the costs behind currency hedging are larger than you might surmise. Adding a currency hedge for 15bps might seem like a deal, but after factoring in the large tracking error introduced by applying a constant hedge seems to magnify the true cost - to the tune of 350bps in one particular case. The original author also notes that currency fluctuations tend to average out over longer time periods (I have seen him quote 17 year cycles - I will try to dig up the supporting paper for that thesis and post that as well).
In the meantime, you can read Larry MacDonald’s article by clicking here.
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