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In this paper, we conduct an empirical evaluation of currency hedging (FXH) strategies designed for Latin American investors managing portfolios of US assets with performance measured in their local currency. By analyzing the volatility and value-at-risk (VaR) of the hedged portfolio, our results reveal that FXH is inefficient in lowering portfolio risk when applied to underlying foreign risk-assets like equities and low credit quality corporate bonds. Conversely, a significant reduction in volatility is evident with FXH when the investments are in safer assets, such as high-grade government and corporate bonds. • We focused on Latin American investors that invest in assets denominated in USD. • We studied effectiveness of FX hedging strategies on reducing portfolio risk. • There are no optimal strategies when the portfolio is composed by risky assets. • Hedging currency risk is recommended for high-quality assets. [ABSTRACT FROM AUTHOR]

In the first decade of the current century, the liberalized economy of India witnessed manifold increase in global trade, owing to which Indian corporates were exposed to the foreign currency fluctuation thus risk of loss due to currency fluctuation. Although forward contracts are the most prevalent derivative contracts to hedge currency risk. However, Indian corporates have undertaken other form of derivatives such as swap, option, and swap option to hedge foreign currency risk. However, lack of inherent understanding of the risk on these derivative instruments, which was meant for hedging currency risks, lead several corporates to incurred huge losses, forcing them to near bankruptcy. The decade 2005-2010 and thereafter saw large losses owing to derivatives both in India and across many other economies, thus impacting corporate profitability, leading to bankruptcy or near bankruptcy for some Indian firms and firms across the globe. The losses incurred by corporates led to acrimonious viewpoints between market intermediaries such as banks and Indian corporates on aspects such as need to undertake such derivatives, leading to litigation, some of which are still pending in Indian courts. Thus, the financial system suffered, and continues to suffer, from many structural gaps and lacks clear understanding of the products, indicating the need for a robust risk management framework. It is still felt that corporates are yet to define their proper risk appetite and risk management framework to undertake derivatives, particularly currency derivatives. Hence, this study is focused on evolving a suitable framework in developing a currency derivative framework for effective risk management for Indian corporates. [ABSTRACT FROM AUTHOR]