Doctoral thesis

Effectiveness of Developed and Emerging Market FX Options In Active Currency Risk Management

Active Currency Risk Management Using Option Structures: This paper explores the effectiveness of currency options in international portfolios. While most academic focus has been o ...

Author(s) :

Suprita Vohra, PhD

Director, Risk Solutions Group at Barclays (Singapore)

Abstract :

Active Currency Risk Management Using Option Structures: This paper explores the effectiveness of currency options in international portfolios. While most academic focus has been on assessing currency risk in a portfolio via measures such as VaR, CVaR etc, several practitioners aim to use this risk in their portfolio as a source of excess returns. We look at the role of FX option structures across developed markets in two contexts: a) as an complement to forwards for portfolio currency risks under the behavioral framework (BPT), and b) as a source of active risk management using MVS (mean variance skewness) and cross asset lower tail dependence framework. Previous research using CVAR as a risk mitigation metric shows forwards dominating options. However, measures using higher moments, such as maximising return and skew per portfolio risk may prove more useful. Furthermore, using this metric as a guide, portfolio currency exposures combined with market views can be incorporated into customized structures to generate uncorrelated excess returns.

Effectiveness of Emerging Market FX Options in Active Currency Risk Management: This paper explores the effectiveness of currency options in international portfolios. While most academic focus has been on assessing currency risk in a portfolio via measures such as VaR, CVaR etc, several practitioners aim to use this risk in their portfolio as a source of excess returns. We look at the role of FX option structures across emerging markets in two contexts: a) as an complement to forwards for portfolio currency risks under the behavioral framework (BPT), and b) as a source of active risk management using MVS (mean variance skewness) and cross asset lower tail dependence framework. Previous research using CVAR as a risk mitigation metric shows forwards dominating options. However, measures using higher moments, such as maximising return and skew per portfolio risk may prove more useful. Furthermore, using this metric as a guide, portfolio currency exposures combined with market views can be incorporated into customized structures to generate uncorrelated excess returns.

Date : 24/08/2016
Thesis Committee :

Supervisor: Frank Fabozzi, EDHEC Business School

External reviewer: Steven Kou, National University of Singapore

Other committee member: René Garcia, EDHEC Business School

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