Advanced Search
MyIDEAS: Login to save this article or follow this journal

Hedging Foreign Investments in U.S. Real Estate with Currency Options

Contents:

Author Info

Registered author(s):

    Abstract

    Historically, the volatility in exchange rates appears to have generated so much risk in U.S. real estate returns that, from the foreign investor's viewpoint, it eliminated any potential for obtaining diversification benefits from these assets. Yet during the past twenty years foreigners purchased and continue to hold enormous amounts of U.S. real estate. This study examines the use of currency options as a means of hedging the exchange rate risk associated with a foreign investment in U.S. real estate. The findings indicate that currency options behave very much like an insurance policy. When used on a continuous basis, they insure foreign investors against any large sudden currency losses and spread the cost of these extreme losses out over time. Thus, from the foreign investor's perspective, the total risk in U.S. real estate returns is substantially reduced. However, these improvements are insufficient to make U.S. real estate consistently attractive to these investors in a mean-variance portfolio framework.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://aux.zicklin.baruch.cuny.edu/jrer/papers/pdf/past/vol08n01/v08p027.pdf
    File Function: Full text
    Download Restriction: no

    Bibliographic Info

    Article provided by American Real Estate Society in its journal Journal of Real Estate Research.

    Volume (Year): 8 (1993)
    Issue (Month): 1 ()
    Pages: 27-54

    as in new window
    Handle: RePEc:jre:issued:v:8:n:1:1993:p:27-54

    Contact details of provider:
    Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
    Email:
    Web page: http://www.aresnet.org/

    Order Information:
    Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
    Email:
    Web: http://aux.zicklin.baruch.cuny.edu/jrer/about/get.htm

    Related research

    Keywords:

    Find related papers by JEL classification:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Elton, Edwin J & Gruber, Martin J & Padberg, Manfred W, 1976. "Simple Criteria for Optimal Portfolio Selection," Journal of Finance, American Finance Association, vol. 31(5), pages 1341-57, December.
    2. Hoag, James W, 1980. " Towards Indices of Real Estate Value and Return," Journal of Finance, American Finance Association, vol. 35(2), pages 569-80, May.
    3. Genberg, Hans, 1978. "Purchasing power parity under fixed and flexible exchange rates," Journal of International Economics, Elsevier, vol. 8(2), pages 247-276, May.
    4. Garman, Mark B. & Kohlhagen, Steven W., 1983. "Foreign currency option values," Journal of International Money and Finance, Elsevier, vol. 2(3), pages 231-237, December.
    5. Solnik, B H, 1974. "The International Pricing of Risk: An Empirical Investigation of the World Capital Market Structure," Journal of Finance, American Finance Association, vol. 29(2), pages 365-78, May.
    6. Adler, Michael & Lehmann, Bruce, 1983. " Deviations from Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 38(5), pages 1471-87, December.
    7. W. B. Brueggeman & A. H. Chen & T. G. Thihodeau, 1984. "Real Estate Investment Funds: Performance and Portfolio Considerations," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 12(3), pages 333-354.
    8. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Addae-Dapaah, Kwame & Tan Yong Hwee, Wilfred, 2009. "The unsung impact of currency risk on the performance of international real property investment," Review of Financial Economics, Elsevier, vol. 18(1), pages 56-65, January.
    2. Craig Ellis & Patrick J. Wilson & Ralf Zurbruegg, 2007. "Real Estate ‘Value’ Stocks and International Diversification," Journal of Property Research, Taylor & Francis Journals, vol. 24(3), pages 265-287, September.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:jre:issued:v:8:n:1:1993:p:27-54. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (JRER Graduate Assistant/Webmaster).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.