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In the following figure, the manager simulated the hedging of all foreign currency exposures to the portfolio's base currency. Using the Hedge to 100% Portfolio to Base Currency Exposure option, he reduced the EUR currency exposure from 60% to 0%, the GBP currency exposure from 10% to 0%, and the JPY currency exposure from 10% to 0%. And he held all of his currency weights in U.S. dollars.
Hedge to 100% Portfolio to Base Currency Exposure - Weights
As we can see in the following figure, the market selection effects and the security selection effects remain unchanged as a result of this strategy. This is to be expected since the manager only shifted the currency exposure. Only the currency selection effect has changed. The negative currency selection effect that we saw in figure, Karnosky –Singer Effects (-0.71%) has changed to a positive currency selection effect (+.062%) in the following figure. And that currency selection effect was added to the market selection effect and security selection effect to calculate the total attributed value, which is equal to the difference between the hedged return of the portfolio and the return of the benchmark.
Hedge to Benchmark Neutral Currency Exposure
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