Currency Hedging with PPP

In the context of institutional mone management, currency management most often involves a decision whether or not to hedge exposure to foreign currencies. These exposures have been acquired in the normal course of business, by investing in foreign securities.
Most economists agree that the concept of purchasing power parity (PPP) describes an important component of how foreign exchange (FX) rates ought, in theory, to be determined. There is much less agreement as to how well the theory describes real-world conditions. We will describe a PPP-based methodology that has proven its efficacy over time.
The proprietary algorithms developed by Alford Associates, Inc., by selectively hedging portions of foreign currency exposure, added 3% per year to the returns of an EAFE-like portfolio in a simulation we performed covering the same time period described by the Intersec study just mentioned.
For the most part, the material on our website addresses currency hedging as if that were the only application of interest to our readers. We realize that there will be those, particularly in the fixed-income area, who have the latitude to undertake more aggressive strategies and invest in currencies that appear undervalued in the hope of adding value through the appreciation of those currencies. For such readers, we offer assurances that the success of the system described here is symmetrical - that is to say, it is just as good as predicting currenty appreciation as it is at warning of potential depreciatoin.
Visitors to our website who are interested in further details on other applications are invited to request further information by calling us at 1-413-528-8098 or via email.