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

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.

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File URL: http://pages.jh.edu/jrer/papers/pdf/past/vol08n01/v08p027.pdf
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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

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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
Web page: http://www.aresnet.org/Email:

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


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  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. Genberg, Hans, 1978. "Purchasing power parity under fixed and flexible exchange rates," Journal of International Economics, Elsevier, vol. 8(2), pages 247-276, May.
  6. 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.
  7. 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.
  8. 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.
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