CURRENCY HEDGED INTERNATIONAL EQUITY INVESTMENTS: FROM THE PERSPECTIVES OF SWEDISH AND AMERICAN INVESTORS

Abstract: Using time-series data for 20 major countries over the period 1993–2004 we examine the risk performance of international equity portfolios with full and reduced amounts of exchange rate exposure. The study is performed from the perspectives of both Swedish and American investors. In line with a priori expectations we find that currency hedging using forward contracts tends to decrease the standard deviation of diversified and undiversified international investments. The findings are consistent with regards to different hedging horizons and time periods of study. We identify two main reasons limiting the magnitude of risk reduction stemming from currency hedging when compared to unhedged investments: (1) natural hedges between single countries’ equity indices and exchange rates and (2) currency diversification in a global portfolio context. Since currency hedging nonetheless appears to reduce investment volatility, we conclude that it should be included in the international equity investment strategy of any risk-averse investor.