21. Adviser 1: A currency cannot consistently appreciate or depreciate relative to an investor's local currency, since some local or global economic adjustment must eventually redress the currency change. Therefore, having currency exposure in a portfolio increases risk but does not increase long-term expected returns. Since you are not compensated for taking currency risk, you should always hedge a portfolio's currency exposure back to your local currency.

Adviser 2: I completely disagree, except as to the implication that economic changes are related to currency changes. Because economic changes affect international stocks, bonds, and currencies, as well as domestic stocks and bonds in ways that often offset each other, currency exposure improves diversification in a portfolio. Portfolios should never hedge their currency exposures; otherwise, they would be less diversified.

Adviser 1 Rebuttal: "I have evidence which would appear to refute your claim of improved diversification resulting from currency exposure. Mystudies of hedged and un hedged international bond portfolios show very little difference between either their risks or returns over the past ten years .

Evaluate the strengths and weaknesses of each of the two approaches presented above. Recommend and justify an alternative currency strategy that draws from the strengths of each approach and corrects their weaknesses.