Optimal Currency Hedging

29 Pages Posted: 21 Sep 1999 Last revised: 29 Dec 2014

Rui A. Albuquerque

Boston College, Carroll School of Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: September 11, 2006

Abstract

This paper characterizes optimal currency hedging in several models of downside risk. We consider, in turn, three models of hedging: (i) a firm that chooses its hedging policy in the presence of bankruptcy costs; (ii) an all equity firm that faces a convex tax schedule; and (iii) a firm whose manager is subject to loss aversion. In all these models, and contrary to conventional wisdom, we show that forwards dominate options as hedges of downside risk.

Keywords: Currency hedging, forwards, options, bankruptcy costs, taxes, loss aversion, downside risk

JEL Classification: F31, G30

Suggested Citation

Albuquerque, Rui A., Optimal Currency Hedging (September 11, 2006). Global Finance Journal, Vol. 18, 2007. Available at SSRN: https://ssrn.com/abstract=179688 or http://dx.doi.org/10.2139/ssrn.179688

Rui A. Albuquerque (Contact Author)

Boston College, Carroll School of Management ( email )

140 Commonwealth Avenue
Chustnut Hill, MA 02467-3808
United States

HOME PAGE: http://ruialbuquerque.webs.com

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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