The Journal of Futures Markets, Vol. 17, No. 7, 781–796 (1997)  1997 by John Wiley & Sons, Inc. CCC 0270-7314/97/070781-16 Using Derivatives in Major Currencies for Cross-Hedging Currency Risks in Asian Emerging Markets RAJ AGGARWAL ANDREA L. DEMASKEY INTRODUCTION Cross-border direct and portfolio investments to continue to increase at a faster pace than global economic output, and thus continue to grow in importance. 1 This trend for an ever higher proportion of investments to be made across borders seem to have accelerated in recent years, but an increasing proportion of foreign portfolio investments is going to emerg- ing markets especially, as they offer investments with better risk/return combinations [e.g., Harvey (1994)], even though investing in emerging markets is often limited by their relative lack of liquidity and by restric- Earlier versions of this article were presented at various faculty research seminars and at the 1996 Eastern Finance Association meetings, where it won a Best Paper award. The authors would like to thank participants in these seminars, two anonymous reviewers, R. Daigler, B. Grace, D. Grant, S. Moore, J. Schatzberg, and B. Simkins for comments, and the Mellen Foundation, John Carroll Uni- versity, and Villanova University for research support, but remain responsible for the contents of this article. 1 Cross-border trade in equities was estimated to be about $35 trillion in 1995, having grown 5.5 times in five years (Financial Times, February 16, 1996, p. 4). The Bank for International Settlements’ 1992 annual report notes that the ratio of cross-border securities trades to GDP for the industrial countries was under 10% in 1980, but by 1990 it rose to 60, 100, 130, and 700% for Germany, U.S., Japan, and the U.K., respectively. ■ Raj Aggarwal is the Edward J. and Louise E. Mellen Chair in Finance at John Carroll University. ■ Andrea L. DeMaskey is an Assistant Professor of Finance at Villanova University.