Currency Swaps and International Real Estate Investment

This paper examines the efficacy of currency swaps as a hedging mechanism for the exchange rate risk associated with foreign investment in real estate. Earlier studies have concentrated on short‐term hedging instruments such as options and forward contracts. Currency swaps are better suited for use on investments with long‐term holding periods such as real estate. The findings indicate that, although hedging United States real estate investments with currency swaps suppresses most of the risk induced by currency instability, the improvements are insufficient to produce diversification gains for foreign investors in the context of mean‐variance portfolio performance.