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Currency Overlay for Global Equity Portfolios: Cross‐Hedging and Base Currency

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  • Wei Opie
  • Jonathan Dark

Abstract

The effectiveness of a currency overlay hedge for a global equity portfolio can be significantly affected by changes in the base currency. Base currency changes have no significant effect on the hedged portfolio risk; however, they may substantially increase or decrease risk relative to the unhedged position. Australian (AUD) and Canadian (CAD) forwards provide effective cross‐hedging, particularly in combination with one or two other currency hedges. Hedge effectiveness is significantly improved by allowing for natural hedges via a dynamic approach that captures structural change and permits under‐hedging of currency exposures. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 35:186–200, 2015

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  • Wei Opie & Jonathan Dark, 2015. "Currency Overlay for Global Equity Portfolios: Cross‐Hedging and Base Currency," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 35(2), pages 186-200, February.
    • Handle: RePEc:wly:jfutmk:v:35:y:2015:i:2:p:186-200
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    Cited by:

    1. Bent Jesper Christensen & Rasmus Tangsgaard Varneskov, 2021. "Dynamic Global Currency Hedging [Arbitrage in the Foreign Exchange Market: Turning on the Microscope]," Journal of Financial Econometrics, Oxford University Press, vol. 19(1), pages 97-127.
    2. Cho, Jae-Beom & Min, Hong-Ghi & McDonald, Judith Ann, 2020. "Volatility and dynamic currency hedging," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 64(C).
    3. Du, Jiangze & Wang, Jying-Nan & Hsu, Yuan-Teng & Lai, Kin Keung, 2018. "The importance of hedging currency risk: Evidence from CNY and CNH," Economic Modelling, Elsevier, vol. 75(C), pages 81-92.

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