Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/311135 
Year of Publication: 
2024
Series/Report no.: 
ESRB Working Paper Series No. 148
Publisher: 
European Systemic Risk Board (ESRB), European System of Financial Supervision, Frankfurt a. M.
Abstract: 
Over the past decade, European investment funds have substantially increased their investment in dollar-denominated assets to more than 3.8 USD trillion, which should give raise to substantial currency hedging if US investor have reciprical currency exposures in their international portfolios. Using comprehensive new contract level data (EMIR) for the period 2019-2023, we explore how the FX derivative trading by European funds compares to a feasible theoretical benchmark of optimal hedging. We find that hedging behavior by all fund types is often partial, unitary (i.e., with a single currency focus), and sub-optimal. Overall, the observed FX derivative trading does not significantly reduce the return risk of the average European investment funds, even though optimal hedging strategies could without incurring substantial trading costs.
Subjects: 
Global Currency Hedging
Institutional Investors
Mean-Variance Optimization
JEL: 
E44
F31
F32
G11
G15
G23
Persistent Identifier of the first edition: 
ISBN: 
978-92-9472-391-8
Document Type: 
Working Paper

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