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Paper Stats:
Abstract Views: 1647
Downloads: 513
Download Rank: 7324
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Optimal Currency Hedging Under Loss Aversion
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RUI A. ALBUQUERQUE
Boston University - School of Management; Centre for Economic Policy Research (CEPR)
August 1999
Simon School of Business Working Paper FR 99-09
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Abstract:
This paper characterizes optimal currency hedging for a loss averse firm. Loss aversion gives rise to an incentive to hedge downside risk. Contrary to conventional wisdom we show that forwards dominate options in the presence of a concern over downside risk. The dynamic hedge ratio displays zones of inaction and behaves non-monotonically with the exchange rate.
We discuss how to reinterpret loss aversion in the context of two value-maximizing models of hedging: (i) an all equity firm that faces a convex tax schedule; and (ii) a firm that chooses its hedging policy in the presence of bankruptcy costs.
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JEL Classifications: F31, G30
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Working Paper Series
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Suggested Citation
Albuquerque, Rui A., "Optimal Currency Hedging Under Loss Aversion"
(August 1999).
Simon School of Business Working Paper FR 99-09. Available at SSRN: http://ssrn.com/abstract=179688
or DOI: 10.2139/ssrn.179688
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Contact Information for
RUI
A.
ALBUQUERQUE
(Contact Author)
Email address for RUI
A.
ALBUQUERQUE
Boston University - School of Management
595 Commonwealth Avenue
Boston
, MA
02215
United States
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(No e-mail address available for RUI
A.
ALBUQUERQUE
Centre for Economic Policy Research (CEPR)
90-98 Goswell Road
London EC1V 7RR
United Kingdom
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Sep 21, 1999 |
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