INTERNATIONAL REAL ESTATE : MANAGING FOREIGN EXCHANGE RISK

Abstract

Diversification benefits associated with international real estate tend to be eroded by extreme volatility in foreign exchange rates (Ziobrowski and Curcio, 1991). As local investors in international real estate are not known to conscientiously managing their currency exposure with hedge instruments (J. Ooi, 1995), in the wake of the Asian Currency Crisis, this dissertation examines the impact on international real estate asset holding. The choice of hedge instruments and strategy as well as the adjusted rate of return are also discerned. Currency forecasts, which are commonly used to guide investment strategies, are also examined. In analyzing the forward discounts/premiums for various-term forward contracts, it was found that the 6-month forward exacted the least premium for continuous coverage, compared to shorter-termed forward contracts. This is advantageous to the real estate investor as such assets are more illiquid than stocks and bonds Also, in exploring the fundamentals of the Singapore Dollar, the partial-hedge has been shown to perform well in closing downside risks whilst leaving open opportunities to improve returns as well. In examining the performance of international real estate over the Asian Currency Crisis, the findings of this study clearly reflect that hedging can significantly improve the risk/return profile of the real estate investment.