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Benchmark and strategy

Benchmarks have been designed as a measure of investment portfolio managers’ performance to judge. The basic assumption is that selecting randomly a large number of stocks and (or) bonds any investor should be able to compose a portfolio which risk-return trade-off is comparable to that of the total market. Therefore, a professional portfolio manager should be able to consistently beat the performance of such an investment portfolio- i.e. Index.

The Deutsche Bank Currency Returns (DBCR) Index, captures long term systematic returns available in the world currency markets and replicates the three most widely employed FOREX strategies, as follows:

 -carry, when low interest rate currencies are systematically sold and high interest rate currencies are systematically bought;

-valuation, when “overvalued” currencies are systematically sold, and “undervalued” currencies are systematically bought, consequently, moving towards the “fair value”; and

-momentum, which is simply trend following.

The DBCR wraps all the three strategies into a single non-discretionary, rule based index which represents the first investable benchmark for currency markets.

Our goal is to help our clients outperform the benchmark by using a number of the properties delivered by equity ETFs, other investments vehicles and implementing both passive and active investment strategy.

Portfolio of currencies.

We undertake both fundamental analysis of some macroeconomic and monetary policy data, such as: Purchasing Power Parity (PPP), Interest Rate Parity (IRR), Fisher effect and technical (based on charts) historical data are analysed and assessed in order to arrive to the choice of the currencies to create the portfolio.

In the case of the Monetary policy and Macroeconomic analysis the historical data, such as: each country’s current account and budget deficit/proficit, variability in money supply, GDP growth, Central Banks’ monetary policies are taken into consideration. The most important of all would be inflation, interest rates volatility and long-term trends’ analysis.

Purchasing Power Parity (PPP) analysis looks into the level of inflation in the countries in question. If the level of inflation is greater in the country X than that of the country Y, the currency of the first country is supposed to depreciate relative to that of the second country Y, should the PPP hold.  If the latter is the case the future spot rate can be predicted by the formula as follows: S1=S0*(1+Hc)/(1+Hb), where S0 is current spot rate, S1 the next period spot rate, Hc and Hb the respective inflation rates in countries X and Y.

Interest Rate Parity (IRP) analysis looks into the differential in the interest rates. If the IRP holds the currency of the country which offers a higher Interest Rate will appreciate against the currency of the country with the lower Interest Rate, usually in the short term.

Also assessed are:

 the ten-year dynamic of the Debt-to-GDP ratio and Inflation (CPI) of G10 countries and  Short, mid and long-term trends in order to identify and follow current trends of the currencies to constitute the basket.

We take into account the liquidity of the currencies and geography: North America, Europe, Pacific region, Asian developed and emerging countries and Russia.