CURRENCY RISK AND OFFICE INVESTMENTS IN ASIA PACIFIC

Abstract

International investment has gained concern among investors because of enhanced portfolio return and reduced risk attendant to global diversification. However, the enhanced return appears to be negated by exchange rate volatility. In view of this, fluctuating exchange rates has caused currency risk to be considered the most common risk of overseas investments. Unfortunately, the significance of exchange rate volatility to international office investments have not been fully examined. Therefore, this study sought to examine the impact of exchange rate risk on overseas individual and portfolio office investments from the perspective of a Singapore institutional investor. After a review of the literature germane to the study and a case study of nine countries in the Asia Pacific region, namely: Singapore, Malaysia, Hong Kong, Indonesia, Australia, New Zealand, Japan, Philippines and Thailand, it was found that even though currency risk increased the correlation coefficients between the countries, its impact is statistically insignificant for both individual and portfolio office investments. Hence, currency hedging may be optional. However, if an investor wants to hedge against currency risk, it will be effective where there is a positive correlation between exchange rate returns and property returns, and a high "volatility index". It also affirmed the findings of past researchers/studies that international diversification is beneficial to the predominantly domestic investor as the study revealed that Singapore investors could experience reduced risk and enhanced return through "regional" diversification.