Institutional Investors and Foreign Exchange Risk

40 Pages Posted: 12 May 2011

See all articles by Timo P. Korkeamaki

Timo P. Korkeamaki

Hanken School of Economics - Department of Finance and Statistics

Danielle Xu

Gonzaga University

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2011

Abstract

Financial institutions differ from individual investors both in their analytical ability and in their level of diversification. Their access to derivative markets is also superior compared to that enjoyed by individual investors. All these factors make institutional investors more capable of homemade hedging, and thus lead to an expectation that institutions are drawn to firms with higher foreign exchange risk. We observe institutional appetite for FX exposure and find variation among institution types. Institutions that are by their nature more likely to actively manage foreign exchange risk in their portfolio, namely mutual funds and hedge funds, follow our prediction and seek foreign exchange risk. Institutions that are constrained by regulation tend to avoid foreign exchange risk.

Suggested Citation

Korkeamaki, Timo and Xu, Danielle, Institutional Investors and Foreign Exchange Risk (May 1, 2011). International Conference of the French Finance Association (AFFI), May 11-13, 2011. Available at SSRN: https://ssrn.com/abstract=1836899 or http://dx.doi.org/10.2139/ssrn.1836899

Timo Korkeamaki (Contact Author)

Hanken School of Economics - Department of Finance and Statistics ( email )

FI-00101 Helsinki
Finland

Danielle Xu

Gonzaga University ( email )

Spokane, WA 99258
United States

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