‘The management of currency risk is critical to efficient portfolio management. Neil Record is an acknowledged expert in this area. This book is comprehensive, timely and much needed.” – Paul Myners – author of the 2001 HM Treasury Review of Institutional Investment in the UK

“This book is unique in that it covers so many different aspects of currency overlay, from benchmarks to management styles to implementation. Neil Record makes this often complex area easy to understand with a good blend of theory and practical examples. The book should appeal to a broad range of investment industry professionals.” – James Mitchell, Senior Research Analyst, Frank Russell Company

“Neil Record can rightly claim to be one of the pioneers of currency overlay management, and has drawn on his decades of experience in this field to write this comprehensive and authoritative book covering virtually everything worth knowing about the subject, in a very readable style. I strongly recommend this book to all institutional investors and investment consultants dealing with international investments.” – Bill Muysken, Global Head of Research, Mercer Investment Consulting

“There may be fewer major currencies these days, but the volatility of the dollar, euro and yen against each other will keep currency overlay specialist busy. Neil Record has filled a gap with his comprehensive analysis of an important investment specialty, enlivened by the vital insights of an experienced practitioner.” – Barry Riley, Financial Journalist

“Currencies are an integral part of international investing, and this long-overdue book, written by an experienced currency practitioner, is very welcome. Neil Record provides a thorough description of both practical and theoretical issues, and I expect this book to have wide appeal in the investment community.” – Peter Gilbert, Chief Investment Officer, Pennsylvania State Employees Retirement System

Currency overlay is the management of the currency exposure inherent in cross-border institutional investments. Exposure to foreign currencies increases the volatility of their returns, without increasing the returns themselves and academics and consultants recommended that the currency exposure should be stripped out of international portfolios and eliminated as far as practicable.

This book provides a comprehensive description of currency overlay, its history and possible future developments and growth, the reason for its emergence, the debates and controversies, the different styles of currency management, and the industry's performance track record.

This is a subject of international appeal and is an area of particular growth potential for institutional investors.  Coverage includes:

•  The theoretical case for eliminating currency risk in international portfolios
• The interplay between asset returns and currency returns, and the effect of this on hedging decisions
• Benchmarks - their construction and strategic role
• Least-cost passive overlay
• The structure of the currency market, and its 'inefficiencies'
• Active overlay styles
• Active overlay both restricted and unrestricted (currency alpha)
• Uses diagrams, charts, tables and explanatory boxes to explain concepts

Currency overlay has grown in parallel with the international diversification of institutional investment portfolios. Currency overlay mandates now cover around $100bn in assets, and 18 years since the first overlay mandate, currency overlay has now come of age.

Currency Overlaylooks at all the components that make up an overlay mandate and the decisions and analysis leading up to it. It is written in an accessible style, designed for the interested asset manager, pension fund manager, investment consultant, trustee or student.

Many of the author's analyses start from first principles. Concepts important to the case are fully explained before utilising them, allowing the reader with no prior knowledge of the subject to exercise independent judgement. The author makes wide use of self-contained 'boxes' to illustrate and explain particular elements or concepts.

Currency Overlaycovers, amongst other topics:

* The theoretical case for eliminating currency risk in international portfolios

* The interplay between asset returns and currency returns, and the effect of this on hedging decisions

* Benchmarks - their construction and strategic role

* Least-cost passive overlay

* The structure of the currency market, and its 'inefficiencies'

* Active overlay styles

* Active overlay both restricted and unrestricted (currency alpha)

List of boxes.

Biography.

Acknowledgements.

1. Introduction.

2. The Problem.

3. Currency Hedging.

4. Foreign Exchange Market – History and Structure.

5. Theory of Currency Hedging of International Portfolios.

6. Passive Currency Overlay.

7. Currency Overlay Benchmarks.

8. Overlaying Different Asset Classes.

9. Is the Currency Market Efficient?

10. Active Currency Overlay – Management Styles.

11. Active Currency Overlay – Evidence of Performance.

12. Implementing Currency Overlay.

13. Looking Ahead.

References/Useful Reading.

Appendix 1. Boundary Conditions for Forward Arbitrage.

Appendix 2. Lognormal Returns.

Appendix 3. AIMR^®Report.

Appendix 4. Sample Investment Guidelines.

Index.