This thesis studies currency premia and their connections with macroeconomics. In the first essay, I link currency premia to capital-output ratios and the well-known “Lucas Paradox”. The “Lucas Paradox” states that there are large and persistent differences in capital-output ratios across countries, suggesting capital is not flowing to countries where it is relatively scarce. In the data, capital-output ratios vary a lot cross-sectionally even within developed countries, and they are negatively correlated with currency risk premia and risk-free rates. To rationalize these patterns, I build a quantitative multi-country model of capital accumulation with external habit and heterogeneous exposures to a global productivity shock. I show that currency risk in this model generates cross-country variations in risk-free rates and capital-output ratios that are consistent with the data. I estimate the model using GDP data from countries issuing the G10 currencies and find two main results: (1) The heterogenous loadings that I extract from GDP data alone are highly correlated with capital-output ratios; and (2) when I feed the estimated loadings into the model, model-generated capital-output ratios account for roughly 55% of the cross-country variation in the data. I conclude that variation in currency risk and therefore currency risk premia have significant effects on the real economy. In the second essay, I identify a quantitative puzzle when using canonical consumption-based asset pricing models to match currency premia under complete markets. Canonical long-run risk and habit models induce a strong, negative correlation between the variance and the mean of the log stochastic discount factor to address the well-known equity premium puzzle. When applied to an open economy with complete markets, this key feature requires that differences in currency returns should arise primarily from predictable appreciations, a requirement that is at odds with the data. We term this tension between a high equity premium, smooth risk-free rates, and largely unpredictable exchange rates the currency premium puzzle and argue it is the underlying reason why existing international asset pricing models have struggled to simultaneously match data on currency returns, equity returns, and risk-free rates. In the third essay, I show that perturbation methods lead to significant computational errors when used to solve international risk-sharing models with Epstein and Zin (1989) preferences. In particular, if countries feature different sizes, the simulating results violate law of iterated expectations. Even under symmetric setups, the errors along a typical simulation path are non-negligible. I conclude that perturbation-based solutions of EZ risk-sharing models should be used with caution.

The world is getting more and more globalized and more countries choose to make business abroad today compared to only ten years ago. To establish abroad involves a lot of risks for a company and one important risk a company need to pay attention to is thecurrency risk. A corporation can be exposed to different kinds of currency risks and there is a lot of derivates to use when hedging against those risks. Which strategy or method a company uses is regulated in its financial policy, which constitutes an important part in the work against currency exposure. The main purpose of this dissertation is to investigate which currency hedging methods and derivates Swedish export companies are using when trading on the international market. Another part of the purpose is to explore if there is a difference between large and small companies when it comes to currency hedging and if there is, why there is a difference. To get the answers of the purpose a qualitative study were used and three intervjues with three companies of different sizes in the energy industry were made. The study also included one interview with an expert in the area of currency hedging. Together with theory and earlier studies the dissertation came to a conclusion. The conclusion of this study was that companies are using different derivates to protect themselves against currency risks and there is a difference between small and large companies in the hedging, mainly in the number of different derivates. Another conclusion that can be drawn was that warrants and futures is the most common derivates among swedish export companies which also is supported by theory and earlier studies. / Världen blir allt mer globaliserad och fler och fler länder väljer att röra sig utanför de nationella gränserna och göra affärer internationellt. Att etablera sig utomlands innebär många risker för ett företag och en viktig risk ett företag måste beakta vid handel internationellt är valutarisken. Ett företag kan bli exponerade mot olika typer av valutarisker och det finns flera instrument att använda sig av för att skydda sig mot dessa. Vilken metod ett företag använder sig av finns reglerat i företagens finanspolicy, vilken utgör en viktig del i arbetet mot valutaexponering. Syftet med uppsatsen är att undersöka vilka valutasäkringsmetoder och instrument svenska exportföretag använder sig av vidinternationell handel för att säkra sig mot valutarisker, samt undersöka om det skiljer sig i hur företag av olika storlek hanterar dessa risker. För att besvara vår frågeställning genomfördes forskningen genom en kvalitativ studie där tre stycken energiföretaget av olika storlek intervjuades. I studien intervjuades även en expert inom området och genom en jämförelse av empirin samt tidigare forskning kunde det dras en slutsats. Undersökningens slutsats var att företagen använder sig av flera olika metoder och instrument vid hanteringen av valutarisker. Den typ avvalutarisk de främst är utsatta för är transaktionsexponeringar på samtliga företag. Studien visade också att det skiljde sig i hur företagen av olika storlek hanterar dessa risker, främst i form av antalet instrument företagen använde sig av. En annan slutsats som kunde göras med en jämförelse av tidigare teori är att swappar och terminer är vanliga instrument medan optioner är ett mindre använt instrument för företag vid valutasäkring.

Master's Thesis deals with currency risk influence on particular bussiness company. The target is based on suggestion of particular measures for risk hedging. Information is gained directly from accounting and from the author's knowledge about the company. Influence of risk is studied primarily separately in relation with gross frofit a nd then in relation with net profit of the firm. Suggestions for currency risk hedging come from the requirements of shareholders, who expect the maximal elimination of the currency risks. For currency risk management were proposed two variants: currency swap and Bull Spread option strategy, which were then theoreticaly rated.

I propose a global risk factor – Currency Traded Risk (CTR). This risk factor is the first to identify the directional link between currencies and equities. CTR captures the genesis of financial globalization, and contains the greatest predictive ability to date for monthly returns on a global stock portfolio. Theoretically, return expectation is intimately linked to time-varying risk premia. Due to the intrinsic scope of currency values in integrating the world’s financial markets, information on time-varying risk premia prices into currencies at greater speed, scale, and global consensus, relative other asset classes. High interest rate currencies proxy as a risk-on asset class. Low interest rate currencies proxy as a risk-off asset class. Innovations in these currencies’ values summarize global risk premia and forecast equity market returns. CTR measures two sources of global risk premia; the difference between averaged spot returns of high interest rate currencies and low interest rate currencies, and the difference between implied and realized volatility of high interest rate currencies. Using recursive regressions, CTR predicts monthly MSCI World Index© returns out of sample, with R2’s consistent at 10% from 2008 to 2017. Currencies track global risk premia, whereas equities respond to it.

[pt] Nesta tese são desenvolvidos três ensaios nos quais foram utilizados arcabouços de finanças com o objetivo de estudar três questões de macroeconomia aplicada. No primeiro ensaio mostramos que, no Brasil, surpresas inflacionárias de curto prazo têm causado desvios nas expectativas inflacionárias de médio prazo. Tal fato obstrui parcialmente um importante canal de transmissão da política monetária, o canal das expectativas. A indexação da economia não parece ser a única responsável pelo fenômeno já que há também efeito significativo destas surpresas no prêmio de risco inflacionário. Portanto, concluímos que a credibilidade da política monetária no período analisado (2001- 2006) não foi perfeita, apesar de ter melhorado significativamente com o passar do tempo. No segundo ensaio analisamos o saldo da conta- corrente como um problema de alocação de portfólio. Mostramos que, empiricamente, o rebalanceamento do portfólio dos países é fundamental e, por esta razão, apresentamos um novo modelo para a conta-corrente no qual as oportunidades de investimento internas e externas são variantes no tempo. Com isso, o ativo externo líquido ótimo varia no tempo gerando um novo mecanismo de variações na contacorrente. Estimamos o modelo para os EUA e Japão e os resultados indicam um poder explicativo superior ao dos modelos tradicionais. O terceiro e último ensaio da tese, investiga um dos determinantes da fragilidade econômico-financeira de países emergentes: a correlação positiva entre o risco país e o risco cambial. Mostramos que a presença deste fenômeno não é generalizada por todos os países emergentes. Além disso, os responsáveis pela inter-relação são, segundo nossos resultados: (i) o descasamento cambial e (ii) o nível de aprofundamento financeiro, medido pelo crédito doméstico ao setor privado. / [en] In this thesis we develop three essays on Macro-Finance. On the first one, we show that, in Brazil, short run inflation surprises had a significant effect in medium run inflation expectation. This phenomenon leads to a less effective monetary policy, as its output cost is higher. This can be a symptom of at least one of two problems: (i) Inflation inertia due to indexation of the economy; and/or (ii) lack of credibility of the monetary authority. As our model suggests, looking at co-movements of inflation risk premium and inflation surprises helps to identify if lack of credibility is one of the causes. By doing so, we confirm that this was the case in Brazil until very recently. On the second essay, we argue that the current account problem can be understood as the choice of where to allocate national savings: at home or abroad. Moreover, the data reveals that portfolio rebalance is indeed important. For this reason, we develop a current account model in which the representative agent´s portfolio choice problem with time- varying investment opportunities. Thus, we are able to generate rebalancing in portfolios that in turn affects the current account. We estimate/solve this model using a long time series data from different assets in the US and Japan and empirical results indicate that variations in investment opportunities can explain at least 54% of its movements, a performance superior to previous models. The third and last essay studies one important source of financial vulnerability for emerging economies: the positive correlation between country and currency risks. This harmful relation observed in some countries is called cousin risks. We, first, identify the extent of this phenomenon by separating a sample of countries into two groups: the one where the positive correlation is observed and the one where it is not. Based on this taxonomy, we investigate the determinants of the cousin risks. Results indicate that currency mismatch and low financial deepening are strongly associated with the phenomenon.

<p>Even though today´s world unwinds on the increasing way of the globalisation, investors are aware of the possibilities the international markets offer and distance is not an issue any more, they are still governed by the “home bias factor“. This phenomenon implies that investors tend to prefer investing in domestic securities rather than entering the global market. Swedish investors are not the exception and the issue of the attraction of foreign fixed income securities is highlighted even more when we have found out there is lack of academic research about the topic from the perspective of Swedish investors. To narrow down the research subject and provide a reader with an interesting approach, we decided to examine the attraction of foreign government bonds from the perspective of Swedish investors.</p><p>At the beginning of the paper we raised three research questions and defined the objective of the paper in questioning the existence of reasons to invest in foreign government bonds. Another research question was defined as identifying our local investor, who is entering the global market and last, but not least, what investing strategy do we recommend him to follow.</p><p>Along the paper we proposed to apply a decent level of informative as well as a scientific approach to provide a reader with a valuable study concerning pre-defined topic. To reach more concrete outcomes of the study we have accepted couple of assumtions which we have identified ourselves with and we have stressed them especially during the theoretical part of the paper.</p><p>After conducting the comprehensive analysis of the Swedish market for government bonds we have identified a huge gap between the demand and supply for such bonds and based on the discussion concerning the opportunities and risks connected with such investments we have defined our investor. Under given assumptions, as the most probable case of occurance we consider a rational investor, who is offsetting the balance of interest rate sensitive assets and liabilities simultaneously looking for the best possible yield, the lowest possible risk and sound level of diversification.</p><p>During the empirical analysis, namely examination of the national yield curves we set first, however very limited investment strategy. After the incorporation of the portfolio theory, currency rate risk and the existence of instruments covering the foreign currency exposure we have come into a conclusion that our investor does not have to necessarily prefer a security from the depicted efficient frontier, but he can employ other securities as well. As a consequence, when using 100% hedging he can use whichever security on the global market.</p><p>At the conclusion, stated findings imply another investigation, since our research was based on very strong assumptions presented during the study. Thus it by far does not provide the reader with a comprehensive investment analysis, which some readers might be interested in. However, even from the beginning we claimed that we do not have such an ambitious goal.</p>

Even though today´s world unwinds on the increasing way of the globalisation, investors are aware of the possibilities the international markets offer and distance is not an issue any more, they are still governed by the “home bias factor“. This phenomenon implies that investors tend to prefer investing in domestic securities rather than entering the global market. Swedish investors are not the exception and the issue of the attraction of foreign fixed income securities is highlighted even more when we have found out there is lack of academic research about the topic from the perspective of Swedish investors. To narrow down the research subject and provide a reader with an interesting approach, we decided to examine the attraction of foreign government bonds from the perspective of Swedish investors. At the beginning of the paper we raised three research questions and defined the objective of the paper in questioning the existence of reasons to invest in foreign government bonds. Another research question was defined as identifying our local investor, who is entering the global market and last, but not least, what investing strategy do we recommend him to follow. Along the paper we proposed to apply a decent level of informative as well as a scientific approach to provide a reader with a valuable study concerning pre-defined topic. To reach more concrete outcomes of the study we have accepted couple of assumtions which we have identified ourselves with and we have stressed them especially during the theoretical part of the paper. After conducting the comprehensive analysis of the Swedish market for government bonds we have identified a huge gap between the demand and supply for such bonds and based on the discussion concerning the opportunities and risks connected with such investments we have defined our investor. Under given assumptions, as the most probable case of occurance we consider a rational investor, who is offsetting the balance of interest rate sensitive assets and liabilities simultaneously looking for the best possible yield, the lowest possible risk and sound level of diversification. During the empirical analysis, namely examination of the national yield curves we set first, however very limited investment strategy. After the incorporation of the portfolio theory, currency rate risk and the existence of instruments covering the foreign currency exposure we have come into a conclusion that our investor does not have to necessarily prefer a security from the depicted efficient frontier, but he can employ other securities as well. As a consequence, when using 100% hedging he can use whichever security on the global market. At the conclusion, stated findings imply another investigation, since our research was based on very strong assumptions presented during the study. Thus it by far does not provide the reader with a comprehensive investment analysis, which some readers might be interested in. However, even from the beginning we claimed that we do not have such an ambitious goal.

Due to globalization investors have increasing opportunities to invest on international markets for diversification purposes. This thesis illustrates the added risks of investing internationally due to volatile exchange rates. The purpose is to analyze how a volatile exchange rate affect the risk and return of a portfolio invested in Sweden, when the investor is located in Japan, United Kingdom or the USA. To analyze the effect of exchange rate volatility the focus is on a portfolio consisting of Swedish stocks from the Stockholm Stock Exchange (SSE) O-list. First the risk and return to a hypothetical Swedish investor not exposed to exchange rate volatility is calculated. Then the effects the exchange rates had on the risk and return if a US investor, UK investor and a Japanese investor invested in the same portfolio is analyzed. For the historical period 2005 the portfolio generated a return of 34.36% and a risk of 7.7%. The empirical work showed that for the international investors the risk was increased with between 1.95% – 410.52% and that the actual return decreased due to weakening currencies against the Krona. In an attempt to predict future exchange rate movements the thesis analyses two financial relationships, PPP and IRP, to calculate equilibrium movements. Both PPP and IRP predicted a depreciation of the Dollar and Pound Sterling against the Krona over the next period, but an appreciation of the Yen against the Krona over the same period. The analytical discussion covers the importance of a well functioning financial system, the institutional effects on exchange rates and the confidence in government policies and their ability to succeed in doing what has been promised.

Syfte: Hantering av valutarisker i ett exporterande företag kan vara avgörande för att nå framgång. Syftet är att undersöka hur valutariskexponering uppstår samt att se hur valutarisk hanteras i två exporterande företag. Uppsatsen behandlar ett stort multinationellt företag och ett mindre företag. Studien jämför olika förhållningssätt i de två företagen samt hur extern respektive intern hantering av riskerna kan skilja sig. Metod: I studien har en kvalitativ ansats tillämpats genom intervjuer med representativa befattningshavare i de båda företagen. Intervjuerna utgår från ett hermeneutiskt synsätt som sedan också till stor del är genomgående i uppsatsen. Förutom intervjuer så har trovärdig sekundärdata använts i förekommande fall.  Resultat &amp; slutsats: Möjlighet till intern hantering av valutarisker skiljer sig mellan stora och små företag. Sandvik har stora resurser för att kunna hantera valutarisker internt samtidigt som CardGroup har mindre resurser och kunskaper för detta. Företagens förhållningssätt till risk skiljer sig men skillnaden beror inte på storleken utan snarare synen på hur affärer görs. Företagens externa metoder för valutariskhantering är snarlika då samma derivatinstrument används, med undantag för hur företagen tillämpar dem genom olika metoder. Förslag till fortsatt forskning: En intressant ansats för vidare studier skulle vara att använda en kvantitativ metod för forskning inom området för att kunna dra mer allmänna slutsatser. Fokus för fortsatta studier kan även vara att utgå från ekonomisk eller omräkningsexponering. Uppsatsens bidrag: Uppsatsen har bidragit till ökad kunskap om vilka metoder och instrument exporterande företag använder och varför. Dessutom har studien belyst hur arbetet kan skilja sig mellan ett stort och ett litet företag. / Aim: Currency risk management can be crucial to reach success in an international environment. The aim of this thesis is to examine currency exposure in exporting companies and to see how they handle currency risk. The thesis consists of one large multinational company and one small local business. Differences in risk approach, internal and external management are examined. Method: The study has a qualitative approach applied by interviews with representative employees in both companies. A hermeneutic approach is used for the interviews and then also to a large extent throughout the essay. In addition to interviews, reliable secondary data where used when appropriate. Result &amp; Conclusions: Internal currency risk management is different depending on the company’s size. Sandvik have great resources in managing currency risk internally while CardGroup have less knowledge and resources to do so. The companies approach to risk is different but the difference is not due to size but rather the perception of how business is done. The external methods of managing currency risk are similar between the companies. The same derivatives are used with exception for how the companies apply them through various methods. Suggestions for future research: An interesting approach for further studies in this field of finance would be to use a quantitative approach to receive general conclusions. Operating and translation exposure can also be focus for future studies. Contribution of the thesis: The thesis has contributed to increased knowledge of which instruments companies use and why companies apply certain methods. In addition the essay examines how this differs between a large and a small company.

<p>Due to globalization investors have increasing opportunities to invest on international markets for diversification purposes. This thesis illustrates the added risks of investing internationally due to volatile exchange rates. The purpose is to analyze how a volatile</p><p>exchange rate affect the risk and return of a portfolio invested in Sweden, when the investor is located in Japan, United Kingdom or the USA.</p><p>To analyze the effect of exchange rate volatility the focus is on a portfolio consisting of Swedish stocks from the Stockholm Stock Exchange (SSE) O-list. First the risk and return to a hypothetical Swedish investor not exposed to exchange rate volatility is calculated.</p><p>Then the effects the exchange rates had on the risk and return if a US investor, UK investor and a Japanese investor invested in the same portfolio is analyzed. For the historical period 2005 the portfolio generated a return of 34.36% and a risk of 7.7%. The empirical work showed that for the international investors the risk was increased</p><p>with between 1.95% – 410.52% and that the actual return decreased due to weakening currencies against the Krona.</p><p>In an attempt to predict future exchange rate movements the thesis analyses two financial relationships, PPP and IRP, to calculate equilibrium movements. Both PPP and IRP predicted a depreciation of the Dollar and Pound Sterling against the Krona over the next</p><p>period, but an appreciation of the Yen against the Krona over the same period.</p><p>The analytical discussion covers the importance of a well functioning financial system, the institutional effects on exchange rates and the confidence in government policies and their ability to succeed in doing what has been promised.</p>