International Investing: Currency Risk in Equity Portfolios

As investors increasingly use international diversification to improve their equity portfolio returns, the understanding and management of currency exposures takes on ever greater importance. While equity managers are generally comfortable analyzing their portfolios for equity-specific risks, such as sector, style or factor biases, for many investors, exchange rate risk remains an area of limited expertise.

This report shows how equity index futures provide investors a more flexible alternative to cash market products for managing the foreign exchange risks inherent in international equity index investments. This is illustrated with the specific case of a fully-funded non-U.S. investor gaining exposure to the S&P 500 via both CME E-mini S&P 500 equity index futures and exchange-traded funds (ETFs).

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