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Currency Overlay for Global Equity Portfolios: Cross‐Hedging and Base Currency

Wei Opie and Jonathan Dark

Journal of Futures Markets, 2015, vol. 35, issue 2, 186-200

Abstract: The effectiveness of a currency overlay hedge for a global equity portfolio can be significantly affected by changes in the base currency. Base currency changes have no significant effect on the hedged portfolio risk; however, they may substantially increase or decrease risk relative to the unhedged position. Australian (AUD) and Canadian (CAD) forwards provide effective cross‐hedging, particularly in combination with one or two other currency hedges. Hedge effectiveness is significantly improved by allowing for natural hedges via a dynamic approach that captures structural change and permits under‐hedging of currency exposures. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 35:186–200, 2015

Date: 2015
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Handle: RePEc:wly:jfutmk:v:35:y:2015:i:2:p:186-200