Since the Fall of 2008, out-of-the money puts on high interest rate currencies have become significantly more expensive than out-of-the-money calls, suggesting a large crash risk of those currencies. To evaluate crash risk precisely, we propose a parsimonious structural model that includes both...

I identify a global currency skewness risk factor. Currency portfolios that have higher average excess returns co-vary more positively with this risk factor. They suffer losses in bad times for currency investors when high interest rate investment currencies have a greater tendency to depreciate...

The stochastic mathematical model of the credit risk process is examined. It is assumed that in unstable economic condition of default may be a cause for credit risk. The fund value of the crediting is considered as some random variable that is changed step-wise at instants of the payments of a...

Operational hedging techniques such as risk sharing, currency collars, and a hybrid arrangement can be used when transactions are subject to unexpected changes in the nominal exchange rate. These hedging devices utilise a risk sharing parameter and the market exchange rate of a currency pair....

We examine the causal relationship between US monetary policy shocks, exchange rates and currency excess returns for a sample of eight advanced countries over the period 1980M1 to 2022M11. We find that the dynamics of the US dollar exchange rate is the main driver of currency excess returns. The...

No matter its source, financial- or policy-related, uncertainty can feed onto itself, concealing its true origin and leading to identification challenges in empirical applications. We add to the existing stock of analytical methods able to disentangle among various types of uncertainty shocks,...

In this paper, we construct alternative theoretical models for exchange rates by introducing additional risk factors, based on the volatility of macroeconomic fundamentals. The modified flexible-price monetary model is used to characterize the long-run equilibrium of exchange rates, while the...

Market segmentation and exchange risk are two main factors that distinguish international financing and investment decisions from domestic ones. Existing studies of market segmentation have been conducted within a framework in which exchange risk is not explicitly recognized. This paper performs...

We find important differences in dollar-based and dollar-neutral G10 carry trades. Dollar-neutral trades have positive average returns, are highly negatively skewed, are correlated with risk factors, and exhibit considerable downside risk. In contrast, a diversified dollar-carry portfolio has a...