Technical Analysis
holding and rolling a one-month FX forward contract. They replicate
a fully tradable strategy, so you can use them as building blocks for
your overlay. Run {IN <GO>} and click into the Strategy tab to view
these performance indexes for 26 currencies against the U.S. dollar.
To build a custom basket made up of 10 of these currency
indexes, run {CIXN <GO>} for the Custom Expression Editor. With
some simple code, you can specify an index composed of five of the
historically highest-yielding emerging-markets currencies and five
of the lowest (FIG. 1). (To load a ready-made version of the strategy,
type “.IEMCARRY” in the command line of a Bloomberg screen and
select the Global CIX: IntraEMCarr item. Then run {CIXU <GO>} to
see the formula.) In this case, the high yielders are the Turkish lira,
South African rand, Mexican peso, Russian ruble, and Indian rupee.Build, Backtest, and Optimize a Custom
FX Overlay Strategy
By OWEN MINDE and ADRIANA BRUNO
DO YOU CONSIDER foreign exchange an asset class? For international
portfolios with flexible FX hedging mandates, currency exposure
can be an asset that provides additional opportunities to generate
alpha, when—and if—markets return to normal. To see how, you
can use the new Bloomberg FX Forward Indices to define an FX
overlay strategy, backtest its performance, and optimize its
parameters to find the best approach.
One common strategy, for example, is a carry trade: Go long
high-yielding currencies and short low yielders. Such a strategy
would earn the difference between the yields—the carry return
(with the caveat that moves in spot rates can rapidly change the
potential for profit).
The Bloomberg FX Forward Indices track the performance of
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