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Risk management for an internationally diversified portfolio

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  • Francesco Menoncin

Abstract

In a simple framework where we have: (i) a stochastic domestic interest rate, (ii) a stochastic exchange rate, (iii) both a domestic and a foreign riskless asset, and (iv) both a domestic and a foreign risky asset, we explicitly compute the optimal asset allocation for an investor who wants to maximize the expected (CRRA) utility of his final wealth. This explicit solution allows us the widely investigate the behaviour of the optimal portfolio hedging component with respect to all the parameters in the model. In particular, we show a numerical simulation for investigating the hedging strategy against the exchange rate risk.

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Paper provided by University of Brescia, Department of Economics in its series Working Papers with number ubs0404.

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Handle: RePEc:ubs:wpaper:ubs0404

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