Chinese Yuan exchange exposures and hedge ratios for international portfolios

From the perspective of Chinese investors, the exchange risk exposures and hedge ratios for international investments in G5 stock markets from August 2006 to February 2009 have been estimated with Adler-Dumas model. The empirical results show that for most currencies except sterling, the exchange exposures of individual stock market indices are not equal to 1, and the exposures of equally weighted portfolio are different from the weight of assets. In summary, U.S. Dollar and Euro have more exchange exposures, Pound Sterling has modest exposure, and Japanese Yen has negative exposure. The results indicate that it is better to hold more than 1 hedge ratio for U.S. Dollar and Euro, 1 hedge ratio for Pound Sterling, and not hedge for Japanese Yen. Moreover, increasing the investment share of Japanese Yen will decline exchange risks in international portfolios.