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Forwards versus Options: Effectiveness in Hedging Currency Risk in International Portfolios

Alvarado-Vargas, Cecilia LU and Kessakorn, Khwanchanok LU (2013) BUSN88 20131
Department of Business Administration
Abstract
This paper aims to examine effectiveness of currency hedging of forward contracts and options in international portfolio, consisting of assets denominated in Chinese Yuan and Indian Rupee. Instead of applying Markowitz’s portfolio optimization, mean-CVaR framework is used in order to deal with non-normality of return of financial assets as well as exchange rates. In this paper, the finding shows that hedging strategies, either with forwards or options yield better performance compared to unhedged strategy. In this research, there is no clear conclusion whether forward contracts or put options outperforms one another. The conclusion is different at different level of strike prices. Forward contract is more effective compared to put option... (More)
This paper aims to examine effectiveness of currency hedging of forward contracts and options in international portfolio, consisting of assets denominated in Chinese Yuan and Indian Rupee. Instead of applying Markowitz’s portfolio optimization, mean-CVaR framework is used in order to deal with non-normality of return of financial assets as well as exchange rates. In this paper, the finding shows that hedging strategies, either with forwards or options yield better performance compared to unhedged strategy. In this research, there is no clear conclusion whether forward contracts or put options outperforms one another. The conclusion is different at different level of strike prices. Forward contract is more effective compared to put option with strike price of 1%, 5% and 10% above spot rate whereas put option with strike price of 15% above spot rate is more effective compared to forwards in term of hedging currency risk in international portfolio. (Less)
Please use this url to cite or link to this publication:
author
Alvarado-Vargas, Cecilia LU and Kessakorn, Khwanchanok LU
supervisor
organization
course
BUSN88 20131
year
type
H1 - Master's Degree (One Year)
subject
keywords
Currency Hedging, International Portfolios Diversification, Currency Forward Contracts, Currency Put Options.
language
English
id
3878608
date added to LUP
2013-06-26 13:30:26
date last changed
2013-06-26 13:30:26
@misc{3878608,
  abstract     = {This paper aims to examine effectiveness of currency hedging of forward contracts and options in international portfolio, consisting of assets denominated in Chinese Yuan and Indian Rupee. Instead of applying Markowitz’s portfolio optimization, mean-CVaR framework is used in order to deal with non-normality of return of financial assets as well as exchange rates. In this paper, the finding shows that hedging strategies, either with forwards or options yield better performance compared to unhedged strategy. In this research, there is no clear conclusion whether forward contracts or put options outperforms one another. The conclusion is different at different level of strike prices. Forward contract is more effective compared to put option with strike price of 1%, 5% and 10% above spot rate whereas put option with strike price of 15% above spot rate is more effective compared to forwards in term of hedging currency risk in international portfolio.},
  author       = {Alvarado-Vargas, Cecilia and Kessakorn, Khwanchanok},
  keyword      = {Currency Hedging,International Portfolios Diversification,Currency Forward Contracts,Currency Put Options.},
  language     = {eng},
  note         = {Student Paper},
  title        = {Forwards versus Options: Effectiveness in Hedging Currency Risk in International Portfolios},
  year         = {2013},
}