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

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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.

Suggested Citation

  • Alan J. Ziobrowski & Brigitte J. Ziobrowski, 1993. "Hedging Foreign Investments in U.S. Real Estate with Currency Options," Journal of Real Estate Research, American Real Estate Society, vol. 8(1), pages 27-54.
    • Handle: RePEc:jre:issued:v:8:n:1:1993:p:27-54
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    Cited by:

    1. Kwame Addae‐Dapaah & Wilfred Tan Yong Hwee, 2009. "The unsung impact of currency risk on the performance of international real property investment," Review of Financial Economics, John Wiley & Sons, vol. 18(1), pages 56-65, January.
    2. 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.
    3. C.F. Sirmans & Elaine Worzala, 2003. "International Direct Real Estate Investment: A Review of the Literature," Urban Studies, Urban Studies Journal Limited, vol. 40(5-6), pages 1081-1114, May.
    4. 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.
    5. Halil I. Memis & Steffen Sebastian, 2020. "Währungsabsicherung bei Immobilienaktien außerhalb des Euroraums [Currency hedging for real estate investments outside the Eurozone]," Zeitschrift für Immobilienökonomie (German Journal of Real Estate Research), Springer;Gesellschaft für Immobilienwirtschaftliche Forschung e. V., vol. 6(1), pages 47-63, April.
    6. Philipp Bejol & Nicola Livingstone, 2018. "Revisiting currency swaps: hedging real estate investments in global city markets," Journal of Property Investment & Finance, Emerald Group Publishing Limited, vol. 36(2), pages 191-209, March.
    7. Pat Wilson & Ralf Zurbruegg, 2003. "International Diversification of Real Estate Assets - Is it Worth It? Evidence from the Literature," Working Paper Series 126, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    8. John Gallo & Ying Zhang, 2010. "Global Property Market Diversification," The Journal of Real Estate Finance and Economics, Springer, vol. 41(4), pages 458-485, November.

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    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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