Title : Dynamic Hedging Turned Friendly Fire : Perils of Hedging Foreign Currency Risks
This paper examines the effect of dynamic currency hedging on the performance of open-ended mutual funds that invest in overseas risky assets. Using a unique sample of 27 ‘Siamese Twin’ international mutual fund pairs in Korea which hold identical underlying foreign assets but offer different currency hedging alternatives, we find that hedged portfolios are more volatile than non-hedged portfolios when there is a negative correlation between the value of the foreign currency and the underlying asset. Moreover, we show that under this negative correlation dynamic hedging may adversely affect even the value of the hedged portfolios. Our findings strongly suggest that strategies for hedging foreign currency risk should be designed conditional on the correlation structure between the underlying asset and the currency returns.
Key Words: Dynamic Hedging, Foreign Currency Risk, Open-Ended Funds, International Mutual Funds, Korea
학회소식
학회소식
[2010년 제 4차] Dynamic Hedging Turned Friendly Fire
작성자 : 관리자
조회수 : 767
게시일 :
2010-12-09