Effectiveness of developed and emerging market FX options in active currency risk management

Suprita Vohra and Frank Fabozzi ()

Journal of International Money and Finance, 2019, vol. 96, issue C, 130-146

Abstract: We analyze the effectiveness of developed and emerging market foreign-exchange options in international portfolios as a complement to forwards for actively managing portfolio currency risks under the behavioral framework. Although prior research finds forwards dominate options using the mean-variance framework, measures using other objectives may prove more insightful. We find that foreign-exchange options can be useful behavioral complements to forwards for currency risk management from a perspective of regret risk, mean-skewness, and cross-asset lower-tail dependence. We also draw parallels and contrasts between developed and emerging market foreign-exchange options from a behavioral perspective.

Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:96:y:2019:i:c:p:130-146

DOI: 10.1016/j.jimonfin.2019.04.005

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