Hedging Foreign Currency Portfolios

24 Pages Posted: 27 Sep 2004 Last revised: 2 Mar 2012

See all articles by Louis Gagnon

Louis Gagnon

Queen's University - Smith School of Business

Thomas H. McCurdy

University of Toronto - Rotman School of Management

Greg Lypny

Concordia University, Quebec - John Molson School of Business

Abstract

This paper investigates the dynamic and portfolio effects in a multi-currency hedging problem which incorporates both risk-reduction and speculative components for the futures demand. We model the joint evolution of daily spot portfolio returns and log-differences of the corresponding futures prices in a trivariate GARCH system allowing time-varying covariability between all the components of the system. Hedging performance is evaluated from both risk-minimization and a utility standpoint. Our results show that accounting for portfolio effects in constructing a multi-currency hedge leads to efficiency and utility gains.

Keywords: Hedging, GARCH, portfolio effects, risk-minimization, covariance

Suggested Citation

Gagnon, Louis Joseph and McCurdy, Thomas H. and Lypny, Greg, Hedging Foreign Currency Portfolios. Journal of Empirical Finance, Vol. 5, pp. 197-220, 1998, Available at SSRN: https://ssrn.com/abstract=595139

Louis Joseph Gagnon (Contact Author)

Queen's University - Smith School of Business ( email )

Kingston, Ontario K7L 3N6
Canada
613-533-6707 (Phone)
613-533-2321 (Fax)

Thomas H. McCurdy

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-978-3425 (Phone)
416-971-3048 (Fax)

HOME PAGE: http://www-2.rotman.utoronto.ca/~tmccurdy

Greg Lypny

Concordia University, Quebec - John Molson School of Business ( email )

1455 De Maisonneuve Blvd. West
Montreal, Quebec H3G 1M8
Canada
(514) 848-2788 (Phone)
(514) 848-8654 (Fax)

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