Foreign currency exposure and the hedging possibilities for pension funds

Notes increasing investment by US pension funds in foreign currency denominated assets and briefly outlines previous research on the links between various types of assets currencies. Uses cointegration methodologies on 1978-1996 futures data for commodities and four currencies (Swiss, German, British and Canadian) to assess the long-run stochastic relationships between them; and suggests that currencies are more closely cointegrated with soft commodities and precious metals than with livestock. Considers the implications for hedging and diversification by pension fund managers trying to manage risk.