Evaluating a Currency Overlay Strategy

A leading international investment firm manages a diversified portfolio that includes equities and fixed income securities across various global markets. Recently, the firm has been facing significant currency risk due to fluctuations in exchange rates that affect the performance of its non-domestic investments.

To mitigate this risk, the firm has decided to implement a currency overlay strategy. As the firm’s newly appointed currency manager, you are tasked with evaluating this strategy.

Discuss the key components of a currency overlay strategy and analyze how it aligns with the firm’s investment objectives. Additionally, evaluate the potential benefits and drawbacks of using currency overlay techniques, considering both risk management and the impact on portfolio performance.