This paper investigates the optimal hedging strategy of a domestic expected utility maximizer endowed with a temporarily non-traded position in a foreign investment. The domestic and foreign yield curves, the exchange rate between the two involved currencies, and the foreign investment value are stochastic. We compare the hedger's optimal strategies using their exchange rate forward contracts or futures contracts. The optimal strategy using futures is simpler. With forwards, the investor's hedging strategy itself generates an additional risk, which in turn induces the need for additional hedging.
LIOUI, A. and PONCET, P. (2002). Optimal Currency Risk Hedging. Journal of International Money and Finance, pp. 241-264.