Currency risk management: simulating the Canadian dollar

Purpose – The purpose of this article is to investigate the return associated with a Canadian dollar (C$) investment in the USA under passive, random walk, value at risk, and Sharpe ratio strategies. Design/methodology/approach – To comply with the purpose, this paper used a GARCH model, and used, as basic data, daily C$ exchange rates and weekly US and Canadian interest rates on 90-day CDs, from January 2 to November 26, 2004. Findings – The empirical results suggest that currency returns are positively correlated to risk; and that the return provided by the random walk strategy beats the other strategies considered in this paper. Practical implications – The findings suggest that currency investment is similar to other forms of investment, since it shows a positive relationship between risk and return. It also supports the long-standing belief that sophisticated strategies do not beat simple-minded approaches such as a random walk strategy. Originality/value – This paper uses a utility function to investigate the response of investors to risk and return under different aversion scenarios.Canada, Economic models, Forecasting, Foreign exchange, International finance, Simulation