CURRENCY RISK HEDGING - FUTURES VS. FORWARD

The objective of this paper is to address the issue of choosing betwee n currency forward and currency futures contracts when hedging against currency risk within a stochastic interest rates environment. We comp are between the hedging effectiveness of the two derivative assets bot h within a narrow sense (i.e., volatility minimization) and within a w ide sense (i.e., risk-return trade-off). When judging hedging effectiv eness in the narrow sense, forward and futures contracts give identica l results even if they do not have identical prices. When judging hedg ing effectiveness in the wide sense, the choice between the two contra cts is determined by the correlation between the domestic and the fore ign term structures dynamics. (C) 1998 Elsevier Science B.V. All right s reserved.