Scenario Modeling of Selective Hedging Strategies

20 Pages Posted: 19 Nov 2013 Last revised: 21 Nov 2013

See all articles by Andrea Beltratti

Andrea Beltratti

Bocconi University - Department of Finance

Stavros A. Zenios

Durham University Business School; University of Cyprus; Cyprus Academy of Sciences, Letters, and Arts; Bruegel

Date Written: March 10, 1999

Abstract

We study currency risk management in the context of scenario analysis. We develop scenario-based optimization models that jointly determine the portfolio composition and the hedging strategy within each currency. Thus the model prescribes optimal selective hedging policies. We then study empirically the performance of the models. The new elements of our empirical analysis are: various horizons (one month and one semester), various currency bases, explicit incorporation of realistic transaction costs. The results show that selective hedging strategies dominate the alternatives under some conditions, and that transaction costs are very important in determining the profitability of various currency risk management strategies for both stocks and bonds at the one month horizon.

Keywords: Scenario, Currency hedging, Transaction costs, Optimization, International asset management

JEL Classification: C61, F31, G11

Suggested Citation

Beltratti, Andrea and Zenios, Stavros A., Scenario Modeling of Selective Hedging Strategies (March 10, 1999). Journal of Economic Dynamics and Control, Vol. 28, No. 5, 2004, Available at SSRN: https://ssrn.com/abstract=2356153

Andrea Beltratti

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Stavros A. Zenios (Contact Author)

Durham University Business School ( email )

Mill Hill Lane
Durham, DH1 3LB
United Kingdom

University of Cyprus ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
Cyprus
+357 2 893605 (Phone)

HOME PAGE: http://https://www.researchgate.net/profile/Stavros_Zenios

Cyprus Academy of Sciences, Letters, and Arts ( email )

Nicosia
Cyprus

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium, 1210
Belgium

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