Choosing Currency Weights for Black–Litterman Portfolios

Summary

The discussion considers how to assign benchmark weights to currencies when constructing a currency portfolio with Black–Litterman optimization. Currency weights require a chosen base currency and a defined date and rebalancing frequency. Possible weighting foundations include currencies’ shares of international trade, GDP, or global market capitalization, with the intent of reflecting relative economic importance.

The answer also notes that holdings in international securities already create currency exposures. Those exposures should be considered when building or interpreting an optimized portfolio, since a separate currency allocation may overlap with exposures embedded in the securities. The response offers candidate weighting principles rather than a single prescribed benchmark, and it does not provide data sources, calculation details, or a comparison of their performance.

Key ideas

• Currency weights depend on the selected base currency.
• Specify the date and frequency for which weights are measured.
• Trade shares, GDP, and global market capitalization are possible economic bases for currency weights.
• International securities in a portfolio can contribute currency exposures alongside explicit currency positions.

Tags

# How to calculate market capitalization weights for a currency portfolio?


# How to calculate market capitalization weights for a currency portfolio?












I am implementing Black-Litterman optimization on a currency portfolio and I could not calculate market capitalization weights for currencies.

Please give me some suggestion.

## Answer by AlRacoon (score 3)

https://quant.stackexchange.com/a/43690

Currency indices will require some base currency from which the other currencies weights will be determined. Also, the weights are determined as of some point in time and frequency, and are based on some economic statistic, such as the share of international trade, that reflects their relative importance in the global economy. Other possibilities could be GDP weighted; global market cap weighted, etc.

Another point to consider is that when you use the actual international securities in portfolio optimization/construction, these international assets will also provided currency exposure, as well as their relative importance in the global economy.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.