Hedging performance and hedging objectives: tests of new performance measures in the foreign currency market

Two related approaches are introduced for measuring the performance of hedging strategies. The first summarizes the risk‐return trade‐off as a single annotated numerical value, and the second displays it as a performance curve. Two bounded sets of hedging strategies are used to evaluate empirically the performance measures. One set is divided according to whether it best satisfies short or long hedging objectives. Results show that market conditions often provide opportunities to reduce variance and increase expected return. They also suggest that the Commodity Futures Trading Commission's typical definition of ‘bona fide’ hedging should be reconsidered.