BUSN 2300 Research Paper Personal finance is the study of actions and practices required for one to obtain financial satisfaction. The process includes planning, budgeting, saving, and investing, among many other things. The study of personal finance is extremely important regardless of your age, major, or current financial position. It’s a topic everyone should learn early on to benefit both their present and future lives. There are three decision areas that personal finance activities revolve around: spending, saving, and sharing. These decisions will have long-term effects on one’s finances and future stability. Various personal finance topics that I felt related the most to my Daily Spending Diary are the financial planning process, career planning, health insurance, car insurance, taxes, retirement, credit, student loans, banking, and investments. The Financial Planning Process is the heart of personal finance. The process follows six steps: (1) determine current financial situation; (2) develop your financial goals; (3) identify alternative courses of action; (4) evaluate alternatives; (5) create and implement your financial action plan; (6) review and revise the financial plan. Determining your current financial situation is an imperative step. It can be done by listing your current assets and debts as well as your general spending on items. Many people create personal financial statements to create a visual of where they stand. Developing financial goals is also important. Without a specific goal in mind, it may be more difficult to understand where you’d like to be financially. Examples of financial goals range from saving to purchase a car or home to developing an investment plan to ensure future financial security. As you complete the rest of the steps, especially evaluating alternatives, risks have to be considered. Personal risk isn’t the only thing to worry about, there’s also
Global Currency Hedging
This article is forthcoming in the Journal of Finance. How much should investors hedge the currency exposure implicit in their international portfolios? Using a long sample of foreign exchange rates, stock returns, and bond returns that spans the period between 1975 and 2005, this paper studies the correlation of currency excess returns with stock returns and bond returns. These correlations suggest the existence of a typology of currencies. First, the euro, the Swiss franc, and a portfolio simultaneously long U.S. dollars and short Canadian dollars are negatively correlated with world equity markets and in this sense are "safe" or "reserve" currencies. Second, the Japanese yen and the British pound appear to be only mildly correlated with global equity markets. Third, the currencies of commodity producing countries such as Australia and Canada are positively correlated with world equity markets. These results suggest that investors can minimize their equity risk by not hedging their exposure to reserve currencies, and by hedging or overhedging their exposure to all other currencies. The paper shows that such a currency hedging policy dominates other popular hedging policies such as no hedging, full hedging, or partial, uniform hedging across all currencies. All currencies are uncorrelated or only mildly correlated with bonds, suggesting that international bond investors should fully hedge their currency exposures. Key concepts include: It is striking that the U.S. dollar, Swiss franc, and euro are widely used as reserve currencies by central banks, and more generally as stores of value by corporations and individuals around the world. Interestingly, the euro, the Swiss franc, and a long-short position in the U.S. dollar and the Canadian dollar are negatively correlated with world equity markets. By contrast, other currencies such as the Australian dollar, the Canadian dollar, the Japanese yen, and the British pound are either uncorrelated or positively correlated with world stock markets. These patterns imply that international equity investors can minimize their equity risk by taking short positions in the Australian and Canadian dollars, Japanese yen, and British pound, and long positions in the U.S. dollar, euro, and Swiss franc. For U.S. investors, currency exposures of international equity portfolios should be at least fully hedged, and probably overhedged. Exceptions are the euro and Swiss franc, which should be at most partially hedged. Risk management demands for currencies by bond investors are small or zero, regardless of the home country of these investors, and regardless of whether these investors hold only domestic bonds or an international bond portfolio. Closed for comment; 0 Comment(s) posted.