Currency Hedging for Global Equity Portfolios: Historical Performance

24 Pages Posted: 8 Dec 2017

See all articles by Anthony Seymour

Anthony Seymour

University of Cape Town (UCT)

Florence Chikurunhe

Peregrine Securities

Emlyn James Flint

Legae Peresec; Department of Actuarial Science, University of Cape Town; University of Pretoria

Date Written: December 3, 2017

Abstract

Offshore assets present investors with an increased investment universe and additional opportunities for reward, but embedded exposure to exchange rates can result in additional risk. In this work, we consider a global equity portfolio of five equity indices (US, Japan, Europe, UK and Canada), and examine the historical performance of currency hedging strategies in the context of portfolio risk reduction. Two types of scenario are studied; namely, a holding in a single foreign equity index, and a model global equity portfolio. In the case of the global equity portfolio, it is assumed that the allocations to the equities are fixed and exposures to currencies are solved for in a single combined optimization, taking into account all interactions between the equity indices and currencies.

We show that a theoretical minimum-risk currency exposure level can be calculated which results in less risk than portfolios featuring either full or zero currency exposure. Furthermore, we show that the risk reduction achieved historically by following an easily implementable dynamic currency hedging strategy is comparable to that given by the theoretical, perfect knowledge calculations. Given our focus on minimum-risk hedging strategies, we find that using certain hedging instruments can slightly reduce total portfolio returns. However, in all cases the significant reduction in volatility always leads to superior risk-adjusted returns for the global equity portfolios. Moreover, certain hedging instruments in our historical tests do actually provide both risk reduction and return enhancement.

Keywords: currency hedging, portfolio optimization with derivatives, risk management, dynamic trading strategy

JEL Classification: C15, C32, C4, C5, C61, F31, G11, G13

Suggested Citation

Seymour, Anthony and Chikurunhe, Florence and Flint, Emlyn James, Currency Hedging for Global Equity Portfolios: Historical Performance (December 3, 2017). Available at SSRN: https://ssrn.com/abstract=3081766 or http://dx.doi.org/10.2139/ssrn.3081766

Anthony Seymour

University of Cape Town (UCT) ( email )

Private Bag X3
Rondebosch, Western Cape 7701
South Africa

Florence Chikurunhe

Peregrine Securities ( email )

21 Main Road
Claremont
Cape Town, Western Cape 7700
South Africa
+27117227551 (Phone)

HOME PAGE: http://www.peregrine.co.za

Emlyn James Flint (Contact Author)

Legae Peresec ( email )

15 Cavendish Street
Claremont
Cape Town, Western Cape 7700
South Africa
27117227556 (Phone)

HOME PAGE: http://www.legaeperesec.co.za

Department of Actuarial Science, University of Cape Town ( email )

Actuarial Science Section, University of Cape Town
Private Bag X3, Rondebosch
Cape Town, Western Cape 7701
South Africa
+27 21 650 2475 (Phone)

University of Pretoria ( email )

Economic and Management Sciences
Pretoria, Gauteng 0002
South Africa

HOME PAGE: http://www.up.ac.za/mathematics-and-applied-mathematics

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