Scenario Modeling of Selective Hedging Strategies
20 Pages Posted: 19 Nov 2013 Last revised: 21 Nov 2013
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: Suggested Citation
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