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Currency Options and the Optimal Hedging of Contingent Foreign Exchange Exposure


  • Steil, Benn


This paper applies an expected utility analysis to derive optimal contingent claims for hedging foreign exchange transaction exposures over the complete range of probabilities, as well the optimal forward and option hedge alternatives. Three utility functions are used, covering a wide range of risk postures. In marked contrast with the virtually universal endorsement of option hedging contingent exposures to be found in the financial management literature, the author's results indicate that options have little, if any, useful role to play in the hedging of transaction exposures of any sort. Copyright 1993 by The London School of Economics and Political Science.

Suggested Citation

  • Steil, Benn, 1993. "Currency Options and the Optimal Hedging of Contingent Foreign Exchange Exposure," Economica, London School of Economics and Political Science, vol. 60(240), pages 413-431, November.
  • Handle: RePEc:bla:econom:v:60:y:1993:i:240:p:413-31

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    References listed on IDEAS

    1. Morton I. Kamien & Yair Tauman, 1986. "Fees Versus Royalties and the Private Value of a Patent," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 471-491.
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    3. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 70(1), pages 65-94.
    4. Nancy T. Gallini & Brian D. Wright, 1990. "Technology Transfer under Asymmetric Information," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 147-160, Spring.
    5. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters,in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc.
    6. Huffman, Wallace E. & Evenson, Robert E., 1993. "Science for Agriculture: A Long Term Perspective," Staff General Research Papers Archive 10997, Iowa State University, Department of Economics.
    7. Nancy T. Gallini & Ralph A. Winter, 1985. "Licensing in the Theory of Innovation," RAND Journal of Economics, The RAND Corporation, vol. 16(2), pages 237-252, Summer.
    8. Reinganum, Jennifer F., 1989. "The timing of innovation: Research, development, and diffusion," Handbook of Industrial Organization,in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 14, pages 849-908 Elsevier.
    9. Michael L. Katz & Carl Shapiro, 1985. "On the Licensing of Innovations," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 504-520, Winter.
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    Cited by:

    1. Topaloglou, Nikolas & Vladimirou, Hercules & Zenios, Stavros A., 2011. "Optimizing international portfolios with options and forwards," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3188-3201.
    2. repec:eee:eneeco:v:64:y:2017:i:c:p:415-437 is not listed on IDEAS
    3. Raquel Fonseca & Wolfram Wiesemann & Berç Rustem, 2012. "Robust international portfolio management," Computational Management Science, Springer, vol. 9(1), pages 31-62, February.
    4. Marco Cassader & Sergio Ortobelli Lozza, 2013. "Portfolio selection with options," Working Papers (2013-) 1303_qum, University of Bergamo, Department of Management, Economics and Quantitative Methods.
    5. Raquel J. Fonseca & Steve Zymler & Wolfram Wiesemann & Berc Rustem, 2009. "Robust Optimization of Currency Portfolios," Working Papers 012, COMISEF.
    6. Lien, Donald & Wang, Yan, 2006. "Cross-hedging with futures and options: The effects of disappointment aversion," Journal of Multinational Financial Management, Elsevier, vol. 16(1), pages 16-26, February.

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