Dynamic Hedging of Currency Risk in Investment Strategies

17 Pages Posted: 14 Dec 2018

Date Written: November 22, 2018


Often, investors fully hedge their portfolios for currency risk. This can lead to significant drag in performance for currencies with negative carry. However, not hedging the foreign currency exposure can lead to significant drawdowns, especially for conservative investments. In this paper, we consider a conservative, global tactical asset allocation strategy implemented in US dollar denominated securities for a hypothetical, European investor and highlight the benefits of dynamic currency hedging over static hedging. Using a parsimonious model for hedge ratio based on multiple features of merit and an explicit check for maximum allowed under-hedging, we show that a cost aware, dynamic hedging strategy can reduce the hedging costs substantially while keeping the portfolio risk within mandate specifications.

Keywords: Foreign Exchange, Derivatives, Currency Risk, Optimal Hedging, Dynamic Asset Allocation

JEL Classification: C61, F31, G11, G12, G15

Suggested Citation

Chakravorty, Gaurav and Awasthi, Ankit, Dynamic Hedging of Currency Risk in Investment Strategies (November 22, 2018). Available at SSRN: https://ssrn.com/abstract=3289292 or http://dx.doi.org/10.2139/ssrn.3289292

Gaurav Chakravorty (Contact Author)

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Ankit Awasthi

affiliation not provided to SSRN

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