  In this paper, we present a two-stage stochastic international portfolio
optimisation model to find an optimal allocation for the combination of both
assets and currency hedging positions. Our optimisation model allows a
"currency overlay", or a deviation of currency exposure from asset exposure, to
provide flexibility in hedging against, or in speculation using, currency
exposure. The transaction costs associated with both trading and hedging are
also included.
  To model the realistic dependence structure of the multivariate return
distributions, a new scenario generation method, employing a regular-vine
copula is developed. The use of vine copulas allows a better representation of
the characteristics of returns, specifically, their non-normality and
asymmetric dependencies. It hence improves the representation of the
uncertainty underlying decisions needed for international portfolio
optimisation problems. Efficient portfolios optimised with scenarios generated
from the new vine-copula method are compared with the portfolios from a
standard scenario generation method. Experimental results show that the
proposed method, using realistic non-normal uncertainty, produces portfolios
that give better risk-return reward than those from a standard scenario
generation approach, using normal distributions. The difference in risk-return
compensation is largest when the portfolios are constrained to require higher
returns. The paper shows that it can be important to model the non-normality in
uncertainty, and not just assume normal distributions.
