Mr. Peter F. Christoffersen and Mr. Lorenzo Giorgianni
currencies belonging to the basket.
For investors, knowledge of conditional risk and return of a speculative position in the basket is of paramount importance. For monetary authorities, it is crucial as well because short-term capital flows are a function of the risk-adjusted return on basket-hedges. If the risk-adjusted returns are large, managing the size and volatility of capital inflows can present a severe challenge to monetary policy makers.
When constructing hedged interest rate arbitrage portfolios for basketcurrencies, two issues arise: first, how are the