Skip to main content
SpringerLink
Log in

Multi-currency options and financial institutions' hedging: Correlation does matter

  • Articles
  • Published:
International Advances in Economic Research Aims and scope Submit manuscript

Abstract

This paper examines one element of financial institutions doing business internationally: currency exchange risks. Such risks present significant barriers to profitably and competitively expand financial service markets. This paper compares the cost of alternative options hedging schemes in the presence of multi-currency uncertainties that affect the repayment of financial institutions' portfolios of loans (assets) and debt. Schemes that use separate contracts to hedge each uncertainty are compared to schemes with a single contract to capture all uncertainties simultaneously. The impact of correlation between the different currencies on such hedging policies is investigated. It is found that correlation matters and can significantly affect the cost and the contract choice.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Black, Fischer; Scholes, Myron. "The Pricing of Options and Corporate Liabilities,"Journal of Political Economy, 81, 1973, pp. 637–59.

    Google Scholar 

  • Boyle, P. P.; Evnine, J.; Gibbs, S. "Numerical Evaluation of Multivariate Contingent Claims,"Review of Financial Studies, 2, 2, 1989, pp. 241–50.

    Article  Google Scholar 

  • Campbell, Tim S.; Kracaw, William A. "Corporate Risk Management and the Incentive Effects of Debt,"Journal of Finance, XLV, 1990, pp. 1673–85.

    Google Scholar 

  • Chamberlain, Sandra; Howe, John L.; Popper, Helen. "The Exchange Rate Exposure of U.S. and Japanese Banking Institutions,"Journal of Banking and Finance, 21, 1997, pp. 871–92.

    Article  Google Scholar 

  • Cox, John C.; Ross, Sheldon A.; Rubinstein, Mark. "Option Pricing: A Simplified Approach,"Journal of Financial Economics, 7, 1979, pp. 145–66.

    Article  Google Scholar 

  • Froot, Kenneth A.; Scharfstein, David S.; Stein, Jeremy C. "Risk Management: Coordinating Corporate Investment and Financing Policies,"Journal of Finance, XLVIII, 1993, pp. 1629–58.

    Google Scholar 

  • Garman, Mark B.; Kohlhagen, Steven W. "Foreign Currency Option Values,"Journal of International Money and Finance, 2, 1983, pp. 231–7.

    Article  Google Scholar 

  • Harrison, J. Michael; Kreps, David. "Martingales and Arbitrage in Multiperiod Security Markets,"Journal of Economic Theory, 20, 1979, pp. 381–408.

    Article  Google Scholar 

  • Harrison, J. Michael; Pliska, Stanley. "Martingales and Stochastic Integrals in the Theory of Continuous Trading,"Stochastic Processes and Their Applications, 11, 1981, pp. 313–6.

    Article  Google Scholar 

  • Johnson, Herb. "Options on the Maximum or the Minimum of Several Assets,"Journal of Financial and Quantitative Analysis, 22, 1987, pp. 227–83.

    Google Scholar 

  • Margrabe, William. "The Value of an Option to Exchange One Asset for Another,"Journal of Finance, 33, 1978, pp. 177–86.

    Google Scholar 

  • Martzoukos, Spiros H. "Multivariate Contingent Claims with Stochastic Exercise Price and Multiplicative Uncertainties," working paper, George Washington University, School of Business and Public Management, 1996.

  • Merton, Robert C. "Financial Innovation and Economic Performance,"Journal of Applied Corporate Finance, 4, Winter 1992, pp. 12–22.

    Article  Google Scholar 

  • Nance, Deana R.; Smith, Clifford W., Jr.; Smithson, Charles W. "On the Determinants of Corporate Hedging,"Journal of Finance, XLVIII, 1993, pp. 267–84.

    Google Scholar 

  • Saunders, Anthony.Financial Institutions Management: A Modern Perspective, Homewood, IL: Irwin Press, 2nd ed., 1997, p. 239.

    Google Scholar 

  • Schrand, Catherine; Unal, Haluk. "Hedging and Coordinated Risk Management: Evidence from Thrift Conversions,"Journal of Finance, LIII, 1998, pp. 979–1013.

    Google Scholar 

  • Smith, Clifford W., Jr.; Stulz, Rene M. "The Determinants of Firms' Hedging Policies,"Journal of Financial and Quantitative Analysis, 20, 1985, pp. 391–405.

    Google Scholar 

  • Stulz, Rene M. "Options on the Minimum or the Maximum of Two Risky Assets: Analysis and Applications,"Journal of Financial Economics, 10, 1982, pp. 161–85.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Office of Thrift Supervision, USA

    Sarah K. Bryant

  2. University of Cyprus, Greece

    Spiros H. Martzoukos

Authors
  1. Sarah K. Bryant
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Spiros H. Martzoukos
    View author publications

    You can also search for this author in PubMed Google Scholar

Additional information

The authors greatly appreciate comments from participants at the International Atlantic Economic Conference in Boston, MA, October 8–11, 1998 and the Office of Thrift Supervision research seminar.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Bryant, S.K., Martzoukos, S.H. Multi-currency options and financial institutions' hedging: Correlation does matter. International Advances in Economic Research 5, 478–488 (1999). https://doi.org/10.1007/BF02295545

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1007/BF02295545

Keywords

Search

Navigation