This paper investigates the optimal strategy of an expected utility maximiser who trades interest rate instruments under stochastic yield curves and exchange rate. We derive first his optimal strategy when he is not subject to home bias and trades optimally on foreign bonds. We then show that even if he is subject to home bias, provided he uses currency forward or futures contracts, he achieves a first best optimum. Finally, we show why the strategy using futures is simpler than the one using forwards.
LIOUI, A. and PONCET, P. (1999). International Bond Portfolio Diversification. In: 14ème Conférence Internationale AFFI. Association Française de Finance (AFFI).