Managing Currency Risks for Global Families

Abstract

In a world of increased mobility and globalized business, many families face increasing complexity in the area of currency risk management. This article describes the sources of currency risks for global families and suggests ways to manage them for both ongoing living expenses and cash flows as well as the long-term investment portfolio. In the presence of highly uncertain future consumption, hedging foreign currency risks may become less favorable and a more generic currency allocation to optimize long-term risk–return benefits may be applied. The authors test several of these approaches and find that a consumptionweighted currency basket or equal-weighted baskets may perform best.