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
International Review of Economics and Finance
Volume
10
Issue
2
First Page
159
Last Page
169
ISSN
0094-9655
Identifier
10.1016/S1059-0560(00)00074-5
Publisher
Taylor and Francis
Citation
TSE, Yiu Kuen and Lien, Donald.
Hedging Downside Risk: Futures Versus Options. (2001). International Review of Economics and Finance. 10, (2), 159-169.
Available at: https://ink.library.smu.edu.sg/soe_research/131
Additional URL
https://doi.org/10.1016/S1059-0560(00)00074-5