Selectively hedging the Euro

Previous research has documented that hedging currency exposures improves the performance of the international portfolios of US investors, while no such improvement occurs for non-US investors. We show, however, that this may have changed, in that Euro exchange rates exhibit a great deal more correlation than was demonstrated by French Franc exchange rates or German Mark exchange rates. Furthermore, we examine the efficacy of several selective hedging strategies for hedging the Euro. All of the conditional hedging strategies we examine outperform strategies which never hedge and those which always hedge. The best performing conditional hedging strategy is the forward hedge rule, which stipulates that one hedge only when the forward rate is at a premium.