Multi-currency options and financial institutions' hedging: Correlation does matter

Sarah Bryant and Spiros Martzoukos

International Advances in Economic Research, 1999, vol. 5, issue 4, 478-488

Abstract: This paper examines one element of financial institutions doing business internationally: currency exchange risks. Such risks present significant barriers to profitably and competitively expand financial service markets. This paper compares the cost of alternative options hedging schemes in the presence of multi-currency uncertainties that affect the repayment of financial institutions' portfolios of loans (assets) and debt. Schemes that use separate contracts to hedge each uncertainty are compared to schemes with a single contract to capture all uncertainties simultaneously. The impact of correlation between the different currencies on such hedging policies is investigated. It is found that correlation matters and can significantly affect the cost and the contract choice. Copyright International Atlantic Economic Society 1999

Date: 1999
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DOI: 10.1007/BF02295545

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