Title

Hedging Downside Risk: Futures Versus Options

Publication Type

Journal Article

Publication Date

2001

Abstract

In this paper, we compare the hedging effectiveness of currency futures vs. currency options on the basis of the lower partial moments (LPMs). The LPM measures an individual hedger's downside risk, as opposed to the two-sided risk measure. Two estimation methods are applied to estimate the optimal hedge ratio: the empirical distribution function method and the kernel density estimation method. We consider both methods for three currencies: the British pound, the Deutsche mark, and the Japanese yen. Currency futures are found to be a better hedging instrument than currency option.

Discipline

Economics

Research Areas

Econometrics

Publication

Journal of Statistical Computation and Simulation

Volume

70

Issue

2

First Page

349

Last Page

370

ISSN

0094-9655

Publisher

Taylor and Francis

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