Exchange rate risk: a mean-variance framework

Abstract

In this paper we propose a strategy for Single Transaction Exchange Risk (STERR) hedging that is based on transactors diminishing marginal utility. The Literature deals, extensively, with two distinct hedging strategies strategy is called the Money Market (MM) Hedge, The other in referred to as the Forward Market (FM) Hedge. The commonality of these two strategies is that they are for transactors who are absolute risk averse and, thus, will not tolerate any change rate risk, regardless of costs.