Scenario modelling for selective hedging strategies

✍ Scribed by Andrea Beltratti; Andrea Laurant; Stavros A. Zenios

• Publisher: Elsevier Science
• Year: 2004
• Tongue: English
• Weight: 284 KB
• Volume: 28
• Category: Article
• ISSN: 0165-1889
• DOI: 10.1016/s0165-1889(03)00057-5

✦ Synopsis

We study currency risk management in the context of scenario analysis. We develop scenariobased optimization models that jointly determine the portfolio composition and the hedging strategy within each currency. Thus the model prescribes optimal selective hedging policies. We then study empirically the performance of the models. The new elements of our empirical analysis are: various horizons (one month and one semester), various currency bases, explicit incorporation of realistic transaction costs. The results show that selective hedging strategies dominate the alternatives under some conditions, and that transaction costs are very important in determining the proÿtability of various currency risk management strategies for both stocks and bonds at the one month horizon.