If international capital markets are well integrated and operate efficiently, will FIs be exposed to foreign exchange risk? What are the sources of foreign exchange risk for FIs?
“If international capital markets are well integrated and operate efficiently”, so then you assume mean reversion of currencies over the medium to long term, argument against currency hedging.
But depending on your liquidity requirements, if it is short term, then you should still hedge your currency exposure to short term fluctuations. Given the correlation between fixed income and currency is high, you would want to hedge out undesired currency risk