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Currency hedging for single-currency equity portfolios: Does cross-asset risk matter?

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  • Kunkler, Michael

Abstract

Foreign investors who are fully invested in a single-currency domestic equity portfolio are exposed to domestic equity risk, but also to currency risk. The standard approach to hedging the currency risk optimally is to estimate a single optimal hedge ratio, but this approach hedges only exchange rate risk, not cross-asset risk. We provide an alternative approach that estimates two optimal hedge ratios to adjust the currency exposures—one associated with the domestic currency and one associated with the foreign currency—and hedges both exchange rate risk and cross-asset risk. This alternative approach can significantly reduce risk.

Suggested Citation

  • Kunkler, Michael, 2021. "Currency hedging for single-currency equity portfolios: Does cross-asset risk matter?," Global Finance Journal, Elsevier, vol. 49(C).
    • Handle: RePEc:eee:glofin:v:49:y:2021:i:c:s1044028320302751
    DOI: 10.1016/j.gfj.2020.100575
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    References listed on IDEAS

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    1. Yu, Xing & Shen, Xilin & Li, Yanyan & Gong, Xue, 2023. "Selective hedging strategies for crude oil futures based on market state expectations," Global Finance Journal, Elsevier, vol. 57(C).

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    More about this item

    Keywords

    Currency hedging; Exchange rates; Equity portfolios;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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