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.
Volume (Year): 8 (1993)
Issue (Month): 1 ()
|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/
|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:
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- 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.
- Genberg, Hans, 1978. "Purchasing power parity under fixed and flexible exchange rates," Journal of International Economics, Elsevier, vol. 8(2), pages 247-276, May.
- 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.
- 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.
- 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.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:jre:issued:v:8:n:1:1993:p:27-54. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (JRER Graduate Assistant/Webmaster)
If references are entirely missing, you can add them using this form.