Currency Hedging Over Long Horizons

40 Pages Posted: 14 Jan 2001

See all articles by Kenneth Froot

Kenneth Froot

National Bureau of Economic Research (NBER); Harvard Business School

Date Written: May 1993

Abstract

This paper reexamines the widely-held wisdom that the currency exposure of international investments should be entirely hedged. It finds that the previously documented ability of hedges to reduce portfolio return variance holds at short horizons, but not at long horizons. At horizons of several years, complete hedging not only does not lower return variance, it actually increases the return variance of many portfolios. Hedge ratios chosen to minimize long-run return variance are not only low, they also have no perceptible impact on return variance. The paper reports and explores these results, their apparent causes, and investigates their implications for hedging practice.

Suggested Citation

Froot, Kenneth, Currency Hedging Over Long Horizons (May 1993). NBER Working Paper No. w4355. Available at SSRN: https://ssrn.com/abstract=253996

Kenneth Froot (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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