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Currency Hedging over Long Horizons

Author: Kenneth Froot
Publisher: Cambridge, Mass. National Bureau of Economic Research 1993.
Series: Working paper series (National Bureau of Economic Research), no. w4355.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
This paper reexamines the widely-held wisdom that the currency exposure of international investments should be entirely hedged. It finds that the previously documented ability of hedges to reduce portfolio return variance holds at short horizons, but not at long horizons. At horizons of several years, complete hedging not only does not lower return variance, it actually increases the return variance of many  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Kenneth Froot
OCLC Number: 1027363960
Notes: May 1993.
Description: 1 online resource.
Series Title: Working paper series (National Bureau of Economic Research), no. w4355.
Responsibility: Kenneth A. Froot.

Abstract:

This paper reexamines the widely-held wisdom that the currency exposure of international investments should be entirely hedged. It finds that the previously documented ability of hedges to reduce portfolio return variance holds at short horizons, but not at long horizons. At horizons of several years, complete hedging not only does not lower return variance, it actually increases the return variance of many portfolios. Hedge ratios chosen to minimize long-run return variance are not only low, they also have no perceptible impact on return variance. The paper reports and explores these results, their apparent causes, and investigates their implications for hedging practice.

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