This paper derives optimal hedge ratios with infrequent extreme news events modeled as common jumps in foreign currency spot and futures rates. A dynamic hedging strategy based on a bivariate GARCH model augmented with a common jump component is proposed to manage currency risk. We find...

This paper studies conditional correlated jump dynamics in foreign exchange returns using a new bivariate jump model with autoregressive jump intensities. Using daily data of German Mark against British Pound and Japanese Yen against the U.S. dollar, we find currency return correlations are...