Selectively hedging the Euro |
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| Affiliation: | 1. Discipline of Finance, College of Management, Yuan Ze University, Taoyuan, Taiwan;2. College of Management, Yuan Ze University, Taoyuan, Taiwan;1. Department of Banking and Finance, National Chi Nan University, Taiwan, ROC;2. Department of Finance, National Yunlin University of Science and Technology, Taiwan, ROC;1. Sam M. Walton College of Business, University of Arkansas, United States;2. Daniels College of Business, University of Denver, United States;3. College of Business, Louisiana Tech University, United States;1. Department of Finance, Sauder School of Business, University of British Columbia, 2053 Main Mall, Vancouver, BC V6T 1Z2, Canada;2. Department of Finance, Tilburg University, PO Box 90153, 5000 LE Tilburg, The Netherlands;3. Department of Economics, University of Zürich, Blumlisalpstrasse 10, 8006 Zürich, Switzerland |
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| Abstract: | Previous research has documented that hedging currency exposures improves the performance of the international portfolios of US investors, while no such improvement occurs for non-US investors. We show, however, that this may have changed, in that Euro exchange rates exhibit a great deal more correlation than was demonstrated by French Franc exchange rates or German Mark exchange rates. Furthermore, we examine the efficacy of several selective hedging strategies for hedging the Euro. All of the conditional hedging strategies we examine outperform strategies which never hedge and those which always hedge. The best performing conditional hedging strategy is the forward hedge rule, which stipulates that one hedge only when the forward rate is at a premium. |
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