You are here: Knowledge Center Reading Room

Currency Hedging

E-mail Print PDF

When investing in foreign investments, an investor subjects herself to currency risk (i.e., the changes in the value of the investment due solely to changes in the exchange rate between the investor's native currency and that of the country where the investment is domiciled).  Some investors choose to hedge (i.e., eliminate) this risk by buying currency futures for the investment's currency.

Fischer Black, "Universal Hedging: Optimizing Currency Risk and Reward in International Equity Portfolios," Financial Analysts Journal, July/August 1989, pp. 16-22.  This paper also appeared in the January/February 1995 edition, pp. 161-167.  This paper argues that partial hedging of currency risk is optimal for equity portfolios.  It derives the optimal hedging ratio

Anthony Golowenko, "How Much to Hedge in a Volatile World?," State Street Global Advisors, March 14 2003.  This article summarizes most of the relevant research on this issue.

Back to Reading Room