IDEAS home Printed from
   My bibliography  Save this paper

Hedging Efficiency of Forward and Option Currency Contracts


  • Korsvold, P.E.


This paper compares the foreign exchange hedging efficiency of forward and option currency contracts. Previous studies tend to concentrate on the risk reducing aspect only. They suggest that options seldom are more efficient in reducing foreign exchange risk than forwards or futures. The hypothesis of this paper is that this is due to: 1) the use of the variance a a risk measure, or 2) the assumption that foreign cash flows are non-contingent and certain. This paper reports the results of an analysis which evaluates hedging alternatives in an expected value-risk space. Risk is measured by a probability-weighted function of deviations below a specific target level. Furthermore, both contingent and non-contingent uncertain foreign currency cash flows are analysed. The analysis shows that options tend to dominate forward contracts. Hence options tend to be preferable if the investor is concerned about avoiding returns below the target level, while forward contracts tend to be preferable if the investor measures risk by the variance. Finally, the maximum risk reduction from using options or forward contracts is not very large, except if the foreign currency cash flow and the exchange rate are highly (positively or negatively) correlated.

Suggested Citation

  • Korsvold, P.E., 1994. "Hedging Efficiency of Forward and Option Currency Contracts," Working Papers 195, University of Sydney, School of Economics.
  • Handle: RePEc:syd:wpaper:2123/7421

    Download full text from publisher

    File URL:
    Download Restriction: no


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Lien, Donald & Tse, Yiu Kuen, 2001. "Hedging downside risk: futures vs. options," International Review of Economics & Finance, Elsevier, vol. 10(2), pages 159-169.
    2. Donald Lien & Yiu Kuen Tse, 2000. "Hedging downside risk with futures contracts," Applied Financial Economics, Taylor & Francis Journals, vol. 10(2), pages 163-170.

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:syd:wpaper:2123/7421. 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: (Vanessa Holcombe). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.