Investment Opportunities When Currencies Fluctuate: Taking Advantage of FX Volatility Shaun Osborne, TD Securities
AGENDA What drives currency markets? What is the outlook for the USD, CAD Appreciation of FX trends can help boost returns, protect against adverse moves FX outlook, how this relates to investing, how Canadian-based investors can take advantage Strategies
FX Outlook
FX Outlook
FX Outlook
FX Outlook
FX Outlook
FX Outlook
FX Risk & Exposure Buying an international investment introduces additional risk via the exchange rate During a period where the foreign currency appreciates, investment returns in the home currency increase During a period where the foreign currency depreciates, investment returns in the home currency decrease
FX Risk & Exposure Investor buys Japanese stocks Investor is exposed to JPY Investor s returns are boosted if the JPY strengthens Investor s returns are undermined if the JPY weakens
FX Risk & Exposure Investor buys Japanese stocks Investor sells 110CAD/buys JPY (JPY90.00) to buy 10 ABC Corp shares @ JPY1000 Three months later ABC Corp stock JPY1100 (+10%) Buy CAD/sell JPY 103.50 (CAD +15%) Liquidation 10 * 1100 / 103.50 = CAD106
FX Risk & Exposure Investor buys Japanese stocks Investor sells 110 CAD/buys JPY (JPY90.00) to buy 10 ABC Corp shares @ JPY1000 Buys CAD/sells JPY 3 m forward @ 89.75 Three months later ABC Corp stock JPY1100 (+10%) Buy CAD/sell JPY 89.75 Liquidation (10 * 1100) / 89.75 = CAD122
Hedging Hedging is relatively cheap for institutional investors Most international mutual funds don t hedge FX, some only hedge part of the exposure Those that do hedge want to take FX right out of the equation
Hedging Individual investors can seek out investment funds that hedge FX exposure or funds that speculate in currencies directly Individual investors can utilize currency ETFs to express a view on currencies Investors can select Canadian corporations that generate a large proportion of earnings overseas
Hedging Corporations with large overseas operations will generate more profits if home currency depreciates Corporations with large overseas operations will generate less profits if home currency appreciates
Taking Advantage How do investors profit from TD s outlook for a stronger USD? Buy assets in appreciating currency (US-based hard assets, USD-denominated or unhedged ETFs) Buy Canadian stocks with large US earnings Avoid commodities/commodity producers (higher USD = lower commodity prices generally)
Taking Advantage What if you disagree? Hedge FX (USD) risk Buy hedged ETFs Stick with mainly domestic (CAD-denominated) investments
SUMMATION Currency markets are volatile mean reversion holds but only over the very long run Foreign exposures increases diversification but can increases risk (FX) There are simples ways to protect against adverse FX movements or profit from favourable ones
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