Stochastic analysis of a currency issue

Abstract

This study analyses a potential investment by a possible pension investor in government bonds issued in foreign currency under a risk-return perspective. In particular, the government bond under study is the thirty-year Italy Govt ISIN US465410CC03, denominated in US dollars. By means of stochastic processes, the trend in the exchange rate between the two currencies, the dollar, and the euro, is simulated to assess its impact on the yield to maturity of the government bond considered. The analysis involves determining the probabilities of obtaining a negative yield in the different simulation scenarios. In addition, there are also determined the probabilities of obtaining returns to maturity lower than those obtainable with a similar investment instrument denominated in euro.