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Multi-currency options and financial institutions' hedging: Correlation does matter

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  • Sarah Bryant
  • Spiros Martzoukos

Abstract

This paper examines one element of financial institutions doing business internationally: currency exchange risks. Such risks present significant barriers to profitably and competitively expand financial service markets. This paper compares the cost of alternative options hedging schemes in the presence of multi-currency uncertainties that affect the repayment of financial institutions' portfolios of loans (assets) and debt. Schemes that use separate contracts to hedge each uncertainty are compared to schemes with a single contract to capture all uncertainties simultaneously. The impact of correlation between the different currencies on such hedging policies is investigated. It is found that correlation matters and can significantly affect the cost and the contract choice. Copyright International Atlantic Economic Society 1999

Suggested Citation

  • Sarah Bryant & Spiros Martzoukos, 1999. "Multi-currency options and financial institutions' hedging: Correlation does matter," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 5(4), pages 478-488, November.
    • Handle: RePEc:kap:iaecre:v:5:y:1999:i:4:p:478-488:10.1007/bf02295545
    DOI: 10.1007/BF02295545
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