Research topic: measuring currency risk

Introduction

Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

A key difference between investing in domestic and foreign assets is that the latter exposes the investor to a currency risk. Over the years, most investors have not been careful in characterizing this risk to returns from unhedged portfolios. One simplistic view was to measure the return in domestic currency terms and compare it with returns in local currency terms, and characterize the difference as the "currency effect". The reasoning was that if the exchange rate remains constant from the time of purchase of the foreign asset to its sale, then the currency risk has had zero impact. On the other hand, if the domestic currency has weakened (strengthened) against the foreign currency, the exposure would result in a gain (loss).

Requirements

In this research project, an analyser of currency risk needs to be built. The following inferences should be made:

  1. How to measure currency risk
  2. Whether currency risk is dependent on economic cycles, interest rate differentials or political risk.

Profile of candidate

The following planning is proposed, each is expected to last about 1 month:

  1. Research solution and identify options for development : draft project proposal, investigate options for solution implementation including testing guidelines and storage guidelines.
  2. Develop and implement solution , including half term presentation.
  3. Write final report , including final presentation.

Knowledge of macro-economics a plus.

Introductory knowledge of mathematical statistics a plus.

Terms and conditions

The internship needs not be developed at the office, but can be performed at the university.

An internship reimbursement is applicable.

This project is expected to last 3 months. Although full time availability is recommended, this is not a strict requirement and availability of 3 days or more per week is acceptable. The candidate should be able to manage his/her own time and regularly update Hobury on progress and issues. Both an intermediate (half term) and a final presentation will be part of this internship assignment.

Copyright of the solution remains with Hobury.