There are a wide variety of active currency management strategies that are used in the market, varying at one end of the spectrum from entirely discretionary-based trading to strict rule-based strategies. Three prominent strategies that we will look at in this series of posts are closer to the latter rather than the former end of this spectrum:
Differential forward strategy
Simple trend-following strategy
Optimization of the carry trade
All three of these strategies have consistently added alpha to a portfolio if followed rigorously and interestingly have also proven to be risk reducing compared to unhedged benchmarks. Thus, they also help to boost significantly the portfolio’s Sharpe ratio. With what follows, the contributions and advice of Henrik Pedersen of the CitiFX Risk Advisory Group and Emmanuel Acar of Bank of America’s Risk Management Advisory Group are gratefully acknowledged.

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