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On Universal Currency Hedges

Author

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  • Adler, Michael
  • Prasad, Bhaskar

Abstract

This paper identifies five universal currency hedge ratio (UHR) definitions. These are hedge positions in foreign bonds, stated as a fraction of national or global equity portfolios, that are the same for all investors, regardless of nationality. The first three involve the total demand for foreign bonds and depend on equities not being held for hedging purposes. The last two are associated with variance-minimizing regression hedges. These hold, in general, but are designed exclusively for hedging other traded asset positions. Jensen's inequality makes the choice of measurement currency irrelevant and makes the HRs universal without affecting their values.

Suggested Citation

  • Adler, Michael & Prasad, Bhaskar, 1992. "On Universal Currency Hedges," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(1), pages 19-38, March.
    • Handle: RePEc:cup:jfinqa:v:27:y:1992:i:01:p:19-38_00
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    Cited by:

    1. Eun, Cheol S. & Resnick, Bruce G., 1997. "International equity investment with selective hedging strategies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 7(1), pages 21-42, April.
    2. O'Brien, Thomas J., 2010. "Fundamentals of corporate currency exposure," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(3), pages 310-321, July.
    3. Ludwig B Chincarini, 2007. "The effectiveness of global currency hedging after the Asian crisis," Journal of Asset Management, Palgrave Macmillan, vol. 8(1), pages 34-51, May.
    4. Rustem, Berc, 1995. "Computing optimal multi-currency mean-variance portfolios," Journal of Economic Dynamics and Control, Elsevier, vol. 19(5-7), pages 901-908.
    5. Ryle Perera, 2000. "The role of index bonds in universal currency hedging," Applied Mathematical Finance, Taylor & Francis Journals, vol. 7(4), pages 271-284.
    6. Walker, Eduardo, 2008. "Strategic currency hedging and global portfolio investments upside down," Journal of Business Research, Elsevier, vol. 61(6), pages 657-668, June.
    7. Ogunc, Kurtay, 2008. "Behavioral currency hedging for international portfolios," International Review of Financial Analysis, Elsevier, vol. 17(4), pages 716-727, September.
    8. Suh, Sangwon, 2011. "Currency hedging failure in international equity investments and an efficient hedging strategy: The perspective of Korean investors," Pacific-Basin Finance Journal, Elsevier, vol. 19(4), pages 390-403, September.
    9. Söhnke M. Bartram & Gunter Dufey, 2001. "International Portfolio Investment: Theory, Evidence, and Institutional Framework," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 10(3), pages 85-155, August.
    10. Gómez, Juan Pedro & Zapatero, Fernando, 1997. "The role of institutional investors in international trading: an explanation of the home bias puzzle," DEE - Working Papers. Business Economics. WB 7034, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    11. Marielle de Jong, 2011. "An adequate measure for exchange rate returns," Journal of Asset Management, Palgrave Macmillan, vol. 12(2), pages 85-93, June.

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