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Single and Multiple Portfolio Cross-Hedging with Currency Futures

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  • Andrea L. DeMaskey

    (Villanova University, U.S.A)

Abstract

This article presents empirical evidence on the effectiveness of currency futures cross-hedging with the portfolio model. Single and multiple crosshedges for three minor European and three minor Asian currencies are examined. The performance of the cross-hedged portfolios is measured in terms of maximum possible variance reduction. Realistic simulations of crosshedging effectiveness are used to determine how well the optimal portfolio strategy performs relative to not hedging or a naive cross-hedge. Results show that Asian currency risk cannot be minimized with single or multiple currency futures cross-hedges.Indeed, both the naive and portfolio strategies increase exchange rate risk to the hedger. Because of the diversification benefit, the multiple currency cross-hedge is superior in hedging performance to the single currency cross-hedge. However, a cross-hedge constructed with two different currency futures positions is as effective as one with five different futures contracts.

Suggested Citation

  • Andrea L. DeMaskey, 1997. "Single and Multiple Portfolio Cross-Hedging with Currency Futures," Multinational Finance Journal, Multinational Finance Journal, vol. 1(1), pages 23-46, March.
    • Handle: RePEc:mfj:journl:v:1:y:1997:i:1:p:23-46
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    References listed on IDEAS

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    Cited by:

    1. Darren Butterworth & Phil Holmes, 2005. "The Hedging Effectiveness of U.K. Stock Index Futures Contracts Using an Extended Mean Gini Approach: Evidence for the FTSE 100 and FTSE Mid250 Contracts," Multinational Finance Journal, Multinational Finance Journal, vol. 9(3-4), pages 131-160, September.
    2. Bessler, Wolfgang & Wolff, Dominik, 2014. "Hedging European government bond portfolios during the recent sovereign debt crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 33(C), pages 379-399.
    3. Chris Brooks & Ryan J. Davies & Sang Soo Kim, 2005. "Cross Hedging with Single Stock Futures," ICMA Centre Discussion Papers in Finance icma-dp2004-15, Henley Business School, University of Reading.

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