Dynamic currency hedging is a risk management strategy that aims to vary the amount of hedging in order to provide better results than a static hedging strategy.
The objectives of specific Dynamic Hedging programmes are defined by the benchmark, which is expressed as a hedge ratio:
- If the benchmark is 0% or unhedged, the objective of dynamic hedging will be to add value by increasing the amount of hedging when the exposure currency is going down, with the aim of generating profits from hedging that partially offset losses in the underlying portfolio.
- If the benchmark is 100% or fully hedged, the objective of the dynamic hedging will be to add value by reducing the amount of hedging when the exposure currency is going up, with the aim of reducing the losses from hedging while the underlying portfolio experiences gains.
- If the benchmark is 50% or another partially hedged ratio, the objective of the dynamic hedging will be to add value by varying the hedge ratio in both directions.
Keywords: currency hedging, currency overlay, currency management, currency overlay manager.