Currency hedging for single-currency equity portfolios: Does cross-asset risk matter?

Michael Kunkler

Global Finance Journal, 2021, vol. 49, issue C

Abstract: Foreign investors who are fully invested in a single-currency domestic equity portfolio are exposed to domestic equity risk, but also to currency risk. The standard approach to hedging the currency risk optimally is to estimate a single optimal hedge ratio, but this approach hedges only exchange rate risk, not cross-asset risk. We provide an alternative approach that estimates two optimal hedge ratios to adjust the currency exposures—one associated with the domestic currency and one associated with the foreign currency—and hedges both exchange rate risk and cross-asset risk. This alternative approach can significantly reduce risk.

Keywords: Currency hedging; Exchange rates; Equity portfolios (search for similar items in EconPapers)
JEL-codes: F31 G15 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:49:y:2021:i:c:s1044028320302751

DOI: 10.1016/j.gfj.2020.100575

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