Using forward contracts to hedge foreign investment in US real estate

Abstract

Recent studies on foreign investment in US real estate provide evidence that fluctuating exchange rates are likely to reduce the potential gains from international diversification by making these investments more risky. However, other research has suggested that forward currency contracts may provide an effective mechanism for offsetting exchange rate volatility and thus restore the diversification benefits. Examines the use of forward contracts as a means of hedging the currency risk associated with foreign investment in US real estate. Indicates that, although continuous hedging of US real estate with forward contracts allows foreign investors to eliminate most of the risk induced by currency instability, the improvements are insufficient to produce diversification gains for all foreign investors in the context of meanvariance portfolio performance.

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