Currency Hedging for Long Term Investors with Liabilities

This thesis considers a long term investor with liabilities that invests internationally and therefore runs currency risk and has to decide on how much of this risk it wants to hedge. The purpose of this thesis is to optimize this currency hedging decision. To achieve this, a mean-variance framework is derived that includes exchange rates and liabilities. It will be found that the investment horizon of the investor will play an important role in the optimal currency decision and that this decision also depends on the characteristics of the investor. Furthermore, it will be found that the total exposure to foreign currency in the portfolio is not important in determining the optimal currency decision but that this decision is mainly determined by the correlations of the exchange rates with the assets and the liabilities.