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Currency Overlay for Global Equity Portfolios: Cross‐Hedging and Base Currency
Author(s) -
Opie Wei,
Dark Jonathan
Publication year - 2015
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21662
Subject(s) - currency , hedge , foreign exchange risk , equity (law) , portfolio , economics , financial economics , position (finance) , monetary economics , finance , ecology , political science , law , biology
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