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That Courage is not inconsistent with Caution: Foreign Currency Hedging for Superannuation Funds

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  • Susan Thorp

Abstract

Surveys of Australian superannuation funds verify that most international bond holdings, but not equity holdings, are hedged for currency risk. We compare the mean-variance efficiency of this practice with two alternative strategies: a conventional forward hedge; and a selective hedge triggered by the sign of the interest differential. These strategies produce optimal allocations which stochastically dominate the restricted portfolio according to Barrett-Donald (2003) tests. The advantages of alternative hedging strategies remain when the vector of sample mean returns is replaced by forecasts. Selective hedging works best for equities; conventional hedging for bonds. Adding unhedged bonds does not improve outcomes

Suggested Citation

  • Susan Thorp, 2004. "That Courage is not inconsistent with Caution: Foreign Currency Hedging for Superannuation Funds," Econometric Society 2004 Australasian Meetings 148, Econometric Society.
    • Handle: RePEc:ecm:ausm04:148
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    More about this item

    Keywords

    currency hedging; portfolio allocation; stochastic dominance;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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