In the Currency Risk Management chapter, author discussed that we should have a higher hedge ratio for Fixed Income as they have a positive correlation with currency movement. I can’t understand how there is positive correlation? As interest rate goes up, currency rises (capital inflow) whereas fixed income falls (inverse relationship between bond price and interest rates), doesn’t that imply a negative correlation?
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Sir, I have the same doubt.
The author is very vague about it : “It is often asserted that the correlation between foreign-currency returns and foreign-currency asset returns tends to be greater for fixed-income portfolios than for equity portfolios. This assertion makes intuitive sense: both bonds and currencies react strongly to movements in interest rates, whereas equities respond more to expected earnings. As a result, the implication is that currency exposures provide little diversification benefit to fixed-income portfolios and that the currency risk should be hedged. In contrast, a better argument can be made for carrying currency exposures in global equity portfolios.”