Currency Overlay Implementation Considerations for Company A

Company A, a multinational corporation with significant revenue exposure in Europe, is seeking to implement a currency overlay strategy to manage its foreign exchange risk. The company has identified that its current exposure to the euro (EUR) could significantly impact earnings in the event of unfavorable currency fluctuations.

As part of its currency management strategy, Company A has hired an external manager specializing in currency overlay to enhance its risk-adjusted returns while ensuring that the underlying currency exposure aligns with its overall investment objectives.

Discuss the considerations that Company A should take into account before implementing the currency overlay strategy. In your answer, address key factors such as the selection of the overlay manager, the integration of the overlay with existing asset management strategies, risk management techniques, and potential performance measurement challenges. Support your analysis with relevant examples.