Abstract

The paradox of international investing is that, although foreign investments deliver diversification benefits that help to decrease the asset risk of a portfolio, they also introduce foreign exchange risk. Classic hedging instruments used to hedge this risk have the drawback of hedging not only the risk but the foreign exchange returns as well. Volatility swaps are financial instruments that allow the user pure exposure to the volatility of an asset. While most of the published works on volatility swaps have focused on their use as a speculative instrument, this thesis will attempt to show how portfolio managers can use foreign exchange volatility swaps to manage the currency risk from international equity investments.