International Portfolios with Commodity Futures and Currency Forward Contracts

Abstract

Diversifying internationally produces foreign exchange risks, which investors can manage through hedging procedures. Since commodities drive the economies of many countries, the authors test whether commodities hedging may provide additional benefits to international diversification. They also examine the effect of including foreign currency forward contracts to hedge against foreign exchange risk. The results show that investors with international portfolios of stocks, bonds, and commodities can improve the efficiency of their portfolios by hedging foreign exchange exposure. All hedging strategies improve the efficiency of the portfolios.