Technical white paper--When analyzing cross-border investments, realize that currencies will mean revert

Key Takeaways

It’s important to consider where a currency trades relative to its historical mean when allocating capital overseas.
Our machine learning model trained on 30 years of data demonstrates that a currency hedging strategy based on SVB’s proprietary signals could add significant internal rate of return (IRR) to overseas investments.
The gravitational pull of mean reversion may take years to take hold, so this strategy is appropriate for private equity and growth investors with long-dated investment horizons.

The focus of this paper is to introduce an objective framework to arrive at a hedging decision — when to hedge and how much to hedge — to maximize the economic value of the hedges on the basis of risk versus reward. Click here to view PDF.

Written by

Ivan Asensio, Ph.D.

Ivan Asensio is responsible for delivering strategic risk management advice to clients through direct and iterative dialogue and tailored consulting engagements.

Written by

David Song

David Song is a foreign exchange advisor for Silicon Valley Bank in Menlo Park, California.

FX Risk Advisory for PE & VC Investors

Actionable risk management guidance and hedging strategy ideas for your international investments.

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The views expressed in this article are solely those of the author and do not necessarily reflect the views of SVB Financial Group, Silicon Valley Bank, or any of its affiliates.

This material, including without limitation to the statistical information herein, is provided for informational purposes only. The material is based in part on information from third-party sources that we believe to be reliable but which has not been independently verified by us, and, as such, we do not represent the information is accurate or complete. The information should not be viewed as tax, accounting, investment, legal or other advice, nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation, offer or recommendation to acquire or dispose of any investment, or to engage in any other transaction.

Foreign exchange transactions can be highly risky, and losses may occur in short periods of time if there is an adverse movement of exchange rates. Exchange rates can be highly volatile and are impacted by numerous economic, political and social factors as well as supply and demand and governmental intervention, control and adjustments. Investments in financial instruments carry significant risk, including the possible loss of the principal amount invested. Before entering any foreign exchange transaction, you should obtain advice from your own tax, financial, legal, accounting and other advisors and only make investment decisions on the basis of your own objectives, experience and resources.

All non-SVB named companies listed throughout this document, as represented with the various statistical, thoughts, analysis and insights shared in this document, are independent third parties and are not affiliated with SVB Financial Group.

Technical white paper - When analyzing cross-border investments, realize that currencies will mean revert

Key Takeaways

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