This assignment is structured in two chapters. Firstly, a summary of foreign exchange products: FX forwards, FX futures, FX options and currency swaps. Secondly, drawbacks and limitations of the Markowitz portfolio theory.
A summary of mean-variance portfolio theory limitations studied are:
- It does not protect against improbable black swan events,
- based on historical data that doesn’t guarantee future returns,
- challenging to identify uncorrelated markets due to financial globalization,
- excludes transaction and taxation cost,
- might not represent investor utility function,
- prone to errors due to input sensitivity,
- insensitive to fat-tailed and sked returns,
- difficult to adapt for multi-periods and
- others measure of risk such as VaR, Kelly criterion, semi-variance or maximum acceptable loss.
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