Friday, May 7, 2010

Short Takes: Currency Hedging, Credit Card Balance Insurance, and more

1. Canadian Capitalist published a reader’s analysis of why currency hedging is necessary for ETFs of US stocks. I’m not sold, but the analysis is thoughtful.

2. Preet has yet another reason why credit card balance insurance is a bad idea.

3. Larry MacDonald found a plausible explanation for the high yield offered by some preferred shares of Canadian banks.

4. Big Cajun Man reported on the mortgage scam that Bank of Montreal claims cost them $30 million.

5. Scott Adams is searching for the world’s simplest portfolio.

6. Frugal Trader explains the age amount tax credit and pension income tax credit.

7. Rob Carrick asks whose interest does your financial advisor have at heart?

8. Gail Vaz-Oxlade has a clear explanation of some of the pitfalls of owning mutual funds.

5 comments:

  1. As a shareholder in BMO I hope they recover some of this lost money! Thanks for the mention, have a pleasant weekend.

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  2. Thanks for the link Michael - I think balance protection insurance is big business for the lenders...

    Have a great weekend.

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  3. Thanks for the mention Michael. I'll have to think through the analysis but I'm sure of one thing: the delta between S&P 500 and S&P 500 CAD Hedged returns leads me to conclude that currency hedging has significant costs.

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  4. @CC: Something I was wondering about is whether stock prices tend to adjust for currency swings. If the Canadian dollar drops suddenly, will the price of a large Canadian company that operates multinationally go up (in Canadian dollars) as a result to compensate for the fact that some of its revenues are in other currencies? If so, it isn't correct to just add stock volatility to currency volatility to get overall volatility of unhedged portfolios.

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  5. @Michael: I'm writing about this on Monday. AB's two assumptions are flawed:

    1. The risk of unhedged dollar returns is less than the sum of risk of local market returns and currency risks. Often risks of unhedged portfolio returns was less than risk of local market returns due to negative correlation with exchange rate changes.

    2. A minor point. SD of C$ against the USD was 4.6 over the 1900-2000 period and 4.2 over the 1950-2000 period.

    Data from Triumph of the Optimists. Post on this on Monday.

    Have a great weekend.

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