Introduction

Investment to and from Japan can be very profitable. For example, a dollar invested in the Nikkei Stock Average in 1949 was worth over $500 at the end of 1989. In recent years there has been much Japanese investment in the US, particularly in bonds, stocks, and real estate. The drop in the yen dollar rate from the 260 range in the fall of 1985 to the 120 range at the end of 1987 and its sharp rise back to 160 in mid 1989 and back under 125 in early 1992 shows the extreme risk involved in these investments. This chapter investigates currency hedging strategies for Japanese investors making investments in US assets and Americans investing in Japan. The traditional approach is to fully eliminate the currency risk using forward or futures contracts to offset the long exposure to the foreign currency. For the American investing in Japanese stocks the hedge often provides a bonus: an essentially risk-free gain of 1–4% per year due to the difference in interest rates between the two countries. Although improvements adding risk are conceivably possible this approach is a very satisfactory resolution of this problem. The situation has been much more difficult and complicated for Japanese investment in the US.