CURRENCY HEDGING AND INTERNATIONAL PORTFOLIO INVESTMENTS: A LOCAL PERSPECTIVE

Abstract

Should we use currency hedging? Naturally the answer depends on who asks the question and the effects of hedging on risk and expected returns. This paper considers the perspective of an international investor based in Chile, but also explores whether similar conclusions can be obtained from the perspective of a global investor that invests in Chile. It also analyzes whether the exchange rate regime affects the answers to this question. This question is relevant since foreign portfolio investments by locals has increased significantly in recent years and a large fraction of it is hedged, partly as a response to current pension fund regulations. The paper proposes methodologies and provides evidence which should allow local investors to find optimal hedging policies.