The performance of conditional hedging RMB for international portfolios

This paper investigates the efficacy of conditional hedging strategy for hedging currency risk in international equity portfolios, since the RMB exchange rate system has been reformed. The result shows: the performance of conditional hedging strategy based on the principle of forward premium is better than no hedging and full hedging strategies in all respects. When comparing the average return per unit of risk of hedging stock investment in G5 countries, selective hedging strategy is of the best performance, followed by large premium strategy, and full-hedging strategy is the worst. Also, the efficiency frontier distribution graph of G5 stock portfolios shows that, conditional hedging strategy is in the best position, but the efficiency of full hedging will increase with the rising of risk level. These results indicate that, with gradual enhancement of the effectiveness of Chinese spot foreign exchange market, conditional hedging strategy is a simple and effective method to manage currency risk in international portfolios in the appreciation trend of RMB.