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Effectiveness of developed and emerging market FX options in active currency risk management

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  • Vohra, Suprita
  • Fabozzi, Frank J.

Abstract

We analyze the effectiveness of developed and emerging market foreign-exchange options in international portfolios as a complement to forwards for actively managing portfolio currency risks under the behavioral framework. Although prior research finds forwards dominate options using the mean-variance framework, measures using other objectives may prove more insightful. We find that foreign-exchange options can be useful behavioral complements to forwards for currency risk management from a perspective of regret risk, mean-skewness, and cross-asset lower-tail dependence. We also draw parallels and contrasts between developed and emerging market foreign-exchange options from a behavioral perspective.

Suggested Citation

  • Vohra, Suprita & Fabozzi, Frank J., 2019. "Effectiveness of developed and emerging market FX options in active currency risk management," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 130-146.
    • Handle: RePEc:eee:jimfin:v:96:y:2019:i:c:p:130-146
    DOI: 10.1016/j.jimonfin.2019.04.005
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