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European Investor Currency Hedging: Forwards or Options in International Portfolios

Xu, Yan LU (2014) NEKP02 20141
Department of Economics
Abstract
The hedging effectiveness of currency forward contracts and currency put option for three different portfolios—Portfolio of Emerging Markets, Portfolio of Developed Countries, and the International Portfolio—are examined from the viewpoint of European investors. European Union (EU), United States (US), United Kingdom (UK), Switzerland (SF), Sweden (SE), Denmark (DK), Norway (NK), and Japan (JAP) are considered in the developed countries. China (CH), India (IN), Malaysia (MA), and Thailand (THAI) are the emerging markets in this study. And a combination of these two groups, which formed an international portfolio, is studied as well. As the data of the stock returns, bond returns, and exchange rate returns exhibit asymmetrical... (More)
The hedging effectiveness of currency forward contracts and currency put option for three different portfolios—Portfolio of Emerging Markets, Portfolio of Developed Countries, and the International Portfolio—are examined from the viewpoint of European investors. European Union (EU), United States (US), United Kingdom (UK), Switzerland (SF), Sweden (SE), Denmark (DK), Norway (NK), and Japan (JAP) are considered in the developed countries. China (CH), India (IN), Malaysia (MA), and Thailand (THAI) are the emerging markets in this study. And a combination of these two groups, which formed an international portfolio, is studied as well. As the data of the stock returns, bond returns, and exchange rate returns exhibit asymmetrical characteristics, the downside risk measurement methodology Conditional Value-at-Risk (CVaR) is applied. The significance of the hedging instrument contributes to the portfolio performance in reducing the risks and enhancing the returns simultaneously has been confirmed in all portfolios. In the Portfolio of Emerging Markets, the hedging strategy with 10% strike price put option yield a better result. While under the Portfolio of Developed Countries, although hedging with the 10% strike price put option yields the highest portfolio return, the uncertainty and fluctuant in returns is much lower in 5% option. In the portfolio of internationally diversified investment, there is no clear conclusion of which hedging instrument is over performing the other. (Less)
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author
Xu, Yan LU
supervisor
organization
course
NEKP02 20141
year
type
H2 - Master's Degree (Two Years)
subject
keywords
international portfolio currency hedging, hedging instruments, currency forward contracts, currency put options, optimal portfolio, CVaR
language
English
id
4460297
date added to LUP
2014-06-16 22:41:24
date last changed
2014-06-16 22:41:24
@misc{4460297,
  abstract     = {{The hedging effectiveness of currency forward contracts and currency put option for three different portfolios—Portfolio of Emerging Markets, Portfolio of Developed Countries, and the International Portfolio—are examined from the viewpoint of European investors. European Union (EU), United States (US), United Kingdom (UK), Switzerland (SF), Sweden (SE), Denmark (DK), Norway (NK), and Japan (JAP) are considered in the developed countries. China (CH), India (IN), Malaysia (MA), and Thailand (THAI) are the emerging markets in this study. And a combination of these two groups, which formed an international portfolio, is studied as well. As the data of the stock returns, bond returns, and exchange rate returns exhibit asymmetrical characteristics, the downside risk measurement methodology Conditional Value-at-Risk (CVaR) is applied. The significance of the hedging instrument contributes to the portfolio performance in reducing the risks and enhancing the returns simultaneously has been confirmed in all portfolios. In the Portfolio of Emerging Markets, the hedging strategy with 10% strike price put option yield a better result. While under the Portfolio of Developed Countries, although hedging with the 10% strike price put option yields the highest portfolio return, the uncertainty and fluctuant in returns is much lower in 5% option. In the portfolio of internationally diversified investment, there is no clear conclusion of which hedging instrument is over performing the other.}},
  author       = {{Xu, Yan}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{European Investor Currency Hedging: Forwards or Options in International Portfolios}},
  year         = {{2014}},
}