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Scenario Modeling of Selective Hedging Strategies

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  • Andrea Beltratti
  • Andrea Laurent
  • Stavros A. Zenios

Abstract

We study currency risk management in the context of scenario analysis. We develop scenario-based optimization models that jointly determine the portfolio composition and the hedging strategy within each currency. Thus the model prescribes optimal selective hedging policies. We then study empirically the performance of the models. The new elements of our empirical analysis are: various horizons (one month and one semester), various currency bases, explicit incorporation of realistic transaction costs. The results show that transaction costs are very important in determining the profitability of various currency risk management strategies for both stocks and bonds at the one month horizon.

Suggested Citation

  • Andrea Beltratti & Andrea Laurent & Stavros A. Zenios, 1999. "Scenario Modeling of Selective Hedging Strategies," Center for Financial Institutions Working Papers 99-15, Wharton School Center for Financial Institutions, University of Pennsylvania.
    • Handle: RePEc:wop:pennin:99-15
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    File URL: http://fic.wharton.upenn.edu/fic/papers/99/9915.pdf
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    Cited by:

    1. Yun, Won-Cheol, 2006. "Selective hedging strategies for oil stockpiling," Energy Policy, Elsevier, vol. 34(18), pages 3495-3504, December.

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