Is Complete Hedging Optimal for International Bond Portfolios?

Abstract

Over the 1980s, however, non-U.S. investors could have lowered their international portfolios' risks by taking on some currency exposure. For these investors, the benefits of diversification across currencies more than offset the cost of the currencies' volatilities. Evidently the free-lunch argument misses something, and investors should be concerned that the missing link might change across countries or over time.