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Economic Analysis: Theory and Practice
 

Investment portfolio forex risk hedging in the international stock market

Vol. 16, Iss. 6, JUNE 2017

PDF  Article PDF Version

Received: 20 March 2017

Received in revised form: 24 April 2017

Accepted: 11 May 2017

Available online: 29 June 2017

Subject Heading: INVESTMENT ANALYSIS

JEL Classification: C61, F21, F31, G17

Pages: 1022-1042

https://doi.org/10.24891/ea.16.6.1022

Borochkin A.A. National Research Lobachevsky State University of Nizhny Novgorod, Nizhny Novgorod, Russian Federation
borochkin@yandex.ru

Importance Investment management on the international financial market necessitates a special approach to foreign currency hedging. The majority of international investors fully eliminate risk associated with their foreign-exchange holdings, seeking profits only from stock price differentials. In certain circumstances, a correlation between local currency exchange rate and local stock index may provide additional opportunities for profit generation.
Objectives The aim of the study is to test the hypothesis that partial currency risk-taking may reduce the total portfolio risk and increase return on international investment.
Methods I apply the global optimization approach to calculate investment portfolios for 11 countries of the world. Each portfolio includes shares of 20–25 highly capitalized companies. Descriptive statistic methods are used to check the input data, i.e. random variable calculation, pivot tables. Investment strategy efficiency is assessed based on the Sharpe Ratio, Sortino Ratio, Treynor Ratio and Omega Ratio.
Results Currency hedge position at the rate of about 14 percent of the total portfolio value may increase investment yield by two percentage points annually on the ten-year time span.
Conclusions and Relevance Total currency risk hedge is necessary for investment in developed and developing countries that pursue the policy of regular devaluation of their national currency. Market regulators inside a particular country should take into account that a sudden devaluation of national currency may be needed, if return on the stock market is lower than that of risk-free instruments.

Keywords: international portfolio investment, global optimization, foreign currency hedging

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