Computational Economics

, Volume 45, Issue 1, pp 151–181

Hedging International Foreign Exchange Risks via Option Based Portfolio Insurance

Article
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Abstract

This paper proposes an option-based portfolio insurance method for international foreign exchange risk hedging. Each investor is assumed to maximize the expected utility of his/her portfolio which includes international risky assets and foreign currency index derivatives. The optimal investment is determined for quite general utility functions and hedging constraints. Our results show how and why foreign currency derivatives should be introduced in the investment portfolio to hedge currency risks. The main conclusion of the paper is that new types of options which combine both equity assets and foreign currency derivatives should be used, contrary to the current practice which considers two separate option markets.

Keywords

Foreign exchange risk hedging FX derivatives Option-based portfolio insurance Portfolio optimization 

Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  1. 1.School of FinanceCentral University of Finance and EconomicsBeijing China
  2. 2.School of Economics and ManagementBeihang UniversityBeijing China

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