Enhancing returns on yen: minimizing risk reversal costs
Cash managers and other investors with excess Japanese yen could choose to invest in dollars and to use zero-cost currency options collars (or risk reversals) to limit fluctuations in the dollar-yen exchange rate (as illustrated by VanderLinden and Gramlich, 2005). However, traders know that there is a market-driven, time-varying cost to risk reversals that can reduce their effectiveness in hedging. This paper evaluates a decision rule to reduce the impact of risk reversal costs. This rule, based on a 30-day moving average of risk reversal costs, appears to minimize risk reversal costs when used with the dollar-yen exchange rate. Whether application of the rule significantly improves risk-adjusted returns is less clear.
Year of publication: |
2005
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Authors: | VanderLinden, David ; Nikolov, Kristijan |
Published in: |
Applied Financial Economics. - Taylor & Francis Journals, ISSN 0960-3107. - Vol. 15.2005, 17, p. 1203-1211
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Publisher: |
Taylor & Francis Journals |
Saved in:
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