Currency Hedging and Siegel's Paradox: On Black's Universal Hedging Rule

Bruno Solnik

Review of International Economics, 1993, vol. 1, issue 2, 180-87

Abstract: In an international multicurrency context, with nonstochastic inflation, equilibrium asset pricing models dictate that all investors should hold a combination of their national risk-free bill and the world market portfolio partly hedged against currency risk. We show that the equilibrium hedge ratios are not universal and depend on investors' preferences and relative wealth. So-called universal hedging rules are devoid of solid theoretical underpinning and practical applicability. Copyright 1993 by Blackwell Publishing Ltd.

Date: 1993
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