Hedging the exchange rate risk in international portfolio diversification - Currency forwards versus currency options
论文作者:Raimond Maurer and Shohreh Valiani论文属性:短文 essay登出时间:2008-12-23编辑:点击率:3275
论文字数:6500论文编号:org200812231750279235语种:英语 English地区:中国价格:$ 22
关键词:Portfolio investmentCurrency optionsHedgingDerivative markets
Abstract
Purpose – This study seeks to examine the effectiveness of controlling the currency risk for
international diversified mixed-asset portfolios via two different hedge instruments, currency
forwards and currency options. So far, currency forward has been the most common hedge tool,
which will be compared here with currency options to control the foreign currency exposure risk. In
this regard, several hedging strategies are evaluated and compared with one another.
Design/
methodology/approach – Owing to the highly skewed return distributions of options, the
application of the traditional mean-variance framework for portfolio optimization is doubtful. To
account for this problem, a mean lower partial moment model is employed. An in-the-sample as well
as an out-of-the sample context is used. With in-sample analyses, a block bootstrap test has been used
to statistically test the existence of any significant performance improvement. Following that, to
investigate the consistency of the results, the out-of-sample evaluation has been checked. In addition,
currency trends are also taken into account to test the time-trend dependence of currency movements
and, therefore, the relative potential gains of risk-controlling strategies.
Findings – Results show that European put-in-the-money options have the potential to substitute the
optimally forward-hedged portfolios. Considering the composition of the portfolio in using in-themoney
options and forwards shows that using any of these hedge tools brings a much more
diversified selection of stock and bond markets than no hedging
strategy. The optimal option weights
imply that a put-in-the-money option strategy is more active than at-the-money or out-of-the-money
put options, which implies the dependency of put strategies on the level of strike price. A very
interesting point is that, just by dedicating a very small part of the investment in options, the same
amount of currency risk exposure can be hedged as when one uses the optimal forward hedging. In
the out-of-sample study, the optimally forward-hedged strategy generally presents a much better
performance than any types of put policies.
Practical implications – The research shows the risk and return implications of different currency
hedging strategies. The finding could be of interest for asset managers of internationally diversified
portfolios.
Originality/value – Considering the findings in the out-of-sample perspective, the optimally
forward-hedged minimum risk portfolio dominates all other strategies, while, in the depreciation of
the local currency, this, together with the forward-hedged tangency portfolio selection, would
characterize the dominant portfolio strategies.
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