The relative merits of zero-premium structures
REAL-LIFE PROBLEMS, INNOVATIVE SOLUTIONS
BACKGROUND: Many corporate hedgers use zero-premium structures to hedge their foreign currency exposures, driven more by the savings in premium rather than necessarily the best style of instrument for the currency pair. Here, we show that these structures appear to do a better job than the vanilla instrument when the full cost of insurance is paid. For illustration purposes, we consider the hedging of long six-month EUR exposures against the USD.
PROBLEM: A US corporate hedger is hedging his long
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