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Scenario Modeling of Selective Hedging Strategies

Andrea Beltratti, Andrea Laurent and Stavros Zenios ()

Center for Financial Institutions Working Papers from Wharton School Center for Financial Institutions, University of Pennsylvania

Abstract: We study currency risk management in the context of scenario analysis. We develop scenario-based optimization models that jointly determine the portfolio composition and the hedging strategy within each currency. Thus the model prescribes optimal selective hedging policies. We then study empirically the performance of the models. The new elements of our empirical analysis are: various horizons (one month and one semester), various currency bases, explicit incorporation of realistic transaction costs. The results show that transaction costs are very important in determining the profitability of various currency risk management strategies for both stocks and bonds at the one month horizon.

Date: 1999-03
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