'That Courage is Not Inconsistent with Caution': Currency Hedging for Superannuation Funds
13 Pages Posted: 29 Mar 2005
Surveys of Australian retirement savings funds verify that most international bond holdings, but not equity holdings, have been hedged for currency risk. We compare the mean-variance efficiency of this practice with two alternatives: a conventional forward hedge and a selective hedge triggered by the sign of the interest differential. These strategies generate optimal allocations that stochastically dominate restricted equity hedging according to Barrett-Donald tests. Advantages of alternative hedging strategies remain when sample mean returns are replaced by forecasts. Selective hedging works best for equities; conventional hedging for bonds. Adding unhedged bonds does not improve outcomes.
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