Effectiveness of developed and emerging market FX options in active currency risk management

摘要

We analyze the effectiveness of developed and emerging market foreign-exchange options in international portfolios as a complement to forwards for actively managing portfolio currency risks under the behavioral framework. Although prior research finds forwards dominate options using the mean-variance framework, measures using other objectives may prove more insightful. We find that foreign-exchange options can be useful behavioral complements to forwards for currency risk management from a perspective of regret risk, mean-skewness, and cross-asset lower-tail dependence. We also draw parallels and contrasts between developed and emerging market foreign-exchange options from a behavioral perspective. (C) 2019 Elsevier Ltd. All rights reserved.