The Optimal Hedging Ratio in Global Currency Risk Management
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In this webinar the authors of “Striking a Balance: The Optimal Hedging Ratio and Cost Trade-Offs in Global Currency Risk Management” reviewed the key findings of their extensive historical analysis of market rates, currency hedging strategies, and portfolio returns from January 1975 to October 2021.
The paper included U.S. and Canadian investor perspectives on hedging strategies for seven developed markets (Canada, the United States, the United Kingdom, Germany, Japan, Australia) and three emerging markets (China, Brazil, India). In the webinar, the study authors extended the timeline to March 2023 and added data from Mexico.
The data suggested that Canadian investors should not hedge reserve currencies like the U.S. dollar and the Euro that tend to appreciate when global equity markets decline, and hedge or even overhedge currencies that are uncorrelated or positively correlated with global equity markets. The analysis revealed a variety of optimal hedging strategies for each of the countries in the study, along with a detailed look at hedging costs by country.
Sally Shen, Ph.D., International Research Fellow, Netspar
Luis M. Viceira, Ph.D., George E. Bates Professor, Harvard Business School