This paper introduces the optimal foreign exchange risk hedging
model following a standard portfolio theory. The results indicate that a lower
level of risk can be achieved, given a specified level of expected return, from
using optimization modeling. In the paper the expected hedging return is
defined from the expected cost of the foreign currency using a specified
hedging strategy minus the expected cost of the foreign currency when it is
purchased form the spot market. The focal point of the technique is its ability
to identify optimal combinations of hedging vehicles, those are currency
options, forward contracts, leaving the position open (foreign exchange risk hedging
tools suggested by the US. Department of Commerce) in a closed form.
Cite this paper
Y. Kim, "Optimal Foreign Exchange Risk Hedging: A Mean Variance Portfolio Approach," Theoretical Economics Letters, Vol. 3 No. 1, 2013, pp. 1-6. doi: 10.4236/tel.2013.31001.
 P. Sercu and R. Uppal, “International Financial Markets and the Firm,” South-Western College Publishing, Cincinnati, 1995.
 S. Khoury and K. Chan, “Hedging Foreign Exchange Risk: Selecting the Optimal Tool,” Midland Corporate Finance Journal, Vol. 5, 1988, pp. 40-52.
 N. Beneda, “Optimal Hedging and Foreign Exchange Risk,” Credit and Financial Management Review, 2004.
 Z. Bodie, A. Kane and A. Marcus, “Investments,” Mc-Graw Hill, New York, 2002.
 F. X. Diebold and J. A. Nason, “Nonparametric Exchange Rate Prediction?” Journal of International Economics, Vol. 28, No. 3-4, 1990, pp. 315-332.
 M. Garman and S. Kohlhagen, “Foreign Currency Option Values,” Journal of International Money and Finance, Vol. 2, No. 3, 1983, pp. 231-238.
 W. Greene, “Econometric Analysis,” Pearson Education, Upper Saddle River, 2003.
 E. Marchand, “Computing the Moments of a Truncated Noncentral Ch-Square Distribution,” Journal of Statistical Computation and Simulation, Vol. 55, No. 4, 1996, pp. 23-29. doi:10.1080/00949659608811746
 E. Elton, M. Gruber, S. Brown and W. Goetzmann, “Modern Portfolio Theory and Investment Analysis,” Wiley, New York, 2007.