Hedging Foreign Currency Exposure: Do Fat Tails Matter?
Posted: 20 Dec 1998
Date Written: August 1994
In this paper hedging foreign currency exposure is reconsidered. We investigate the sensitivity of hedge ratios for the well-documented existence of unconditional kurtosis in asset and exchange rate returns. We derive theoretical hedge ratios for fat-tailed asset return distributions and find that they, depending on the degree of relative risk aversion, can differ substantially from the minimum-variance case. The empirical results indicate, however, that there is no significant effect of the fat-tailed hedge ratios on the performance of the hedged portfolios. The performance of hedged portfolios is not very sensitive to the specification of the variance and higher moments.
JEL Classification: F31
Suggested Citation: Suggested Citation