1 March 1994Financial Analysts JournalVolume 50, Issue 2
A Valuation Approach to Currency Hedging
Thomas B. Hazuka
Lex C. Huberts
Because Central Banks manipulate their countries' short interest rates in attempting to control inflation, exchange rates and business-cycle expansions and contractions, real interest rates tend to differ across borders, at least in the short term. A strategy that captures these differences can yield positive returns from opportunistic manipulation of international portfolios' currency exposures. A model that incorporates spot exchange rates, forward exchange rates and estimates of expected inflation is used to forecast the opportunity cost of hedging--the spot rate an internationally diversified portfolio could capture by remaining unhedged versus the forward rate it locks in by being fully hedged. Over a 228-month period, a simulation strategy based on this model outperformed a fully hedged benchmark, an unhedged benchmark and a "naive" strategy based on nominal interest rates.
Read the Complete Article in Financial Analysts Journal
Financial Analysts Journal
CFA Institute Member ContentPublisher Information
Association for Investment Management and Research
5 pages doi.org/10.2469/faj.v50.n2.55ISSN/ISBN: 0015-198X
Functional cookies, which are necessary for basic site functionality like keeping you logged in, are always enabled.