Applications of FX derivatives to portfolio management

Redouane Elkamhi, Frank J. Fabozzi (), Jacky S. H. Lee, Marco Salerno, Kari Vatanen and Suprita Vohra
Additional contact information
Redouane Elkamhi: University of Toronto
Frank J. Fabozzi: Johns Hopkins University
Jacky S. H. Lee: Total Portfolio at Healthcare of Ontario Pension Plan
Marco Salerno: Total Portfolio at Healthcare of Ontario Pension Plan
Kari Vatanen: Elo Pension Insurance Company
Suprita Vohra: Barclays Bank Plc

Journal of Asset Management, 2024, vol. 25, issue 6, No 6, 600-616

Abstract: Abstract This article demonstrates the use of foreign-exchange (FX) derivatives in portfolio management, highlighting the strategic applications of FX forwards, futures, swaps, and options. It begins by detailing how these derivatives help institutional investors mitigate the adverse effects of currency fluctuations on internationally diversified portfolios. A significant focus is placed on currency hedging with derivatives overlays, which consolidate currency exposures across asset classes into a centralized management function, thereby enhancing overall risk management. The article also delves into the strategic uses of FX options, which offer flexible, tailored risk management strategies crucial for handling the complex dynamics of global financial markets. Through real-world examples and theoretical insights, the article illustrates the critical role of FX derivatives in stabilizing portfolio returns and managing exposure to currency risks.

Keywords: Foreign exchange hedging strategies; FX forwards; FX options; Exchange rate; Currency overlay strategy; Interest rate differentials; Risk management (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1057/s41260-024-00368-x

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