Application of FX Options in Portfolio Management

Suprita Vohra ()
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Suprita Vohra: Financial Professional Specializing in Foreign Exchange and Interest Rate Derivatives

Chapter Chapter 19 in Derivatives Applications in Asset Management, 2025, pp 309-324 from Springer

Abstract: Abstract This chapter examines the use of foreign exchange (FX) options as a versatile tool for managing currency risks in globally diversified portfolios. It begins by outlining the challenges faced by portfolio managers operating in multi-currency environments, such as mitigating FX volatility and balancing risk with cost-effectiveness. The study emphasizes the flexibility of FX options, such as ATM options, average rate (Asian) options, and contingent options, which allow portfolio managers to tailor hedging strategies to specific objectives while accounting for market nuances like delta, volatility, and moneyness. Through several case studies, this case illustrates practical applications of FX options in diverse scenarios. The study compares hedging tools, including FX forwards and ATM FX options, highlighting their respective impacts on portfolio returns. It also describes average rate options, which are particularly effective in hedging sustained currency weakness while offering cost efficiency. The study concludes that FX options offer critical advantages for navigating the complexities of global investments.

Keywords: Currency hedging; Emerging markets; FX futures; Local currency risk; Political risk (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-86354-7_19

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DOI: 10.1007/978-3-031-86354-7_19

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