Informed investors recognize that hedging at least some of a portfolio’s currency exposure, in most cases, improves its quality, but the best approach for doing so is not often obvious. We investigate a variety of currency hedging strategies, including linear strategies, non-linear strategies, and combinations thereof, to help investors determine their most suitable strategy.

Currency hedging of institutional portfolios has been the subject of much debate over many years. Our contribution is to present a comprehensive analysis of the costs and benefits of a wide range of currency hedging strategies to facilitate comparison and to help investors choose the strategy that best suits their goals. We consider a collection of linear hedging strategies that hedge a constant fraction of a portfolio’s explicit and implicit currency exposure. In addition, we examine strategies that employ options to hedge currency risk based on a variety of contingencies. Finally, we explore hedging strategies that combine conventional and more sophisticated methods to manage currency risk.