optimal hedge ratio: does it really exist???

Fluctuations in exchange rates can prove detrimental for companies who have forex risk exposure. Movements in exchange rates can increase or reduce return on investments . Hedging serves as a tool to put limit on fluctuations in exchange rate movements. Decision to hedge or not to hedge lies on the quantum of return particular investment will fetch, the associated cost of expenses and also hedging cost.
Hedging currency risk has much greater impact in bonds than in stocks

Sources: Thomson Reuters Datastream, Barclays Capital, Citigroup, Dow Jones, MSCI, Vanguard

 Optimal hedge ratio : Does it really exist???

There is mixed opinion on whether optimal hedge ratio exists there is probably no consensus on what value will it be if optimal hedge ratio exists also. Various researchers have set the hedge ratio between a wide range of 0% to 100% which looks like betting in air. Also researchers have arguments on what is appropriate hedging spectrum,one group opines that  it is full hedged portfolio as currency hedges mitigates risks ( lower it) but not return while other group of experts points that  currency hedges are not fruitful as if real exchange rates and asset prices display mean reversion, then the decision to hedge depends on the investor’s investment horizon and for longer horizons, the unhedged portfolio may be optimal.
In nut shell, the optimal hedge ratio is a function of the investor’s risk tolerance, her beliefs about the movements of currencies and asset prices, and the objectives of the currency hedging decision.