Optimal Currency Hedging

This paper characterizes optimal currency hedging in several models of downside risk. We consider, in turn, three models of hedging: (i) a firm that chooses its hedging policy in the presence of bankruptcy costs; (ii) an all equity firm that faces a convex tax schedule; and (iii) a firm whose manager is subject to loss aversion. In all these models, and contrary to conventional wisdom, we show that forwards dominate options as hedges of downside risk.

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Year of publication:	2004-05-06
Authors:	Albuquerque, Rui
Institutions:	EconWPA
Subject:	Currency hedging \| forwards \| options \| bankruptcy costs \| taxes \| loss aversion \| downside risk

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Extent:	application/pdf
Series:	Finance.
Type of publication:	Book / Working Paper
Notes:	Type of Document - pdf
Classification:	F31 - Foreign Exchange ; G30 - Corporate Finance and Governance. General
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10005134928