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Urban Ulrych: Optimal hedging of FX exposure for international asset allocation

Date: 20. 3. 2017
Source: Seminar for probability, statistics, and financial mathematics
Četrtek, 23. marca 2017, ob 14:30 v predavalnici 3.06 na FMF, Jadranska 21, Ljubljana

V četrtek, 23. marca 2017, ob 14:30 bo v predavalnici 3.06 Fakultete za matematiko in fiziko Univerze v Ljubljani na Jadranski ulici 21 v Ljubljani potekalo predavanje Urbana Ulrycha z naslovom Optimal hedging of FX exposure for international asset allocation.

Abstract: International investment is a natural approach for any investor seeking diversification and potentially improved portfolio performance. Consequently, the foreign currency exposures need to be appropriately considered. We show that full hedging is not suitable and develop a model for finding the optimal hedging of FX exposure, minimizing an arbitrary risk measure (volatility, semivolatility, value at risk, expected shortfall etc.) in a general portfolio setting. Explicit formulas and quadratic programming methods based on the portfolio return variance-covariance structure are derived in order to minimize the volatility of returns and the existence and uniqueness of the solution are proved. For the minimization of a general risk measure, different Monte Carlo sampling techniques are used to generate the future empirical returns and numerical methods are applied to optimize the risk measures. A hedging strategy generalizing those methods into a dynamic and multi period setting is proposed and a back test on the historical market data is performed, showing that the derived approaches yield a robust, cost efficient and risk reductive hedging strategy.