Optimal Currency Hedging

Rui Albuquerque ()

Finance from EconWPA

Abstract: This paper characterizes optimal currency hedging in several models of downside risk. We consider, in turn, three models of hedging: (i) a firm that chooses its hedging policy in the presence of bankruptcy costs; (ii) an all equity firm that faces a convex tax schedule; and (iii) a firm whose manager is subject to loss aversion. In all these models, and contrary to conventional wisdom, we show that forwards dominate options as hedges of downside risk.

Keywords: Currency hedging; forwards; options; bankruptcy costs; taxes; loss aversion; downside risk (search for similar items in EconPapers)
JEL-codes: F31 G30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin and nep-ifn
Date: 2004-05-06
Note: Type of Document - pdf
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http://129.3.20.41/eps/fin/papers/0405/0405010.pdf (application/pdf)

Related works:
Journal Article: Optimal currency hedging (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0405010

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