This paper examines the issue of optimal currency allocation for an international investor who is both risk- and ambiguity-averse. Utilizing a robust mean–variance model that incorporates smooth ambiguity preferences, we derive a closed-form solution for the optimal currency exposure. Within this theoretical framework, the demand for optimal currency hedging is formulated as the solution to a generalized ridge regression. Our findings indicate that the investor’s aversion to model uncertainty increases the demand for hedging. The empirical analysis illustrates that ambiguity introduces greater estimation bias and narrows the confidence interval of the optimal currency exposure estimator. An out-of-sample backtest further demonstrates that incorporating ambiguity into the model improves the stability of optimal currency allocation over time and significantly reduces portfolio volatility after accounting for transaction costs.

We analyze American put options in a hyper-exponential jump-diffusion model. Our contribution is threefold. Firstly, by following a maturity randomization approach, we solve the partial integro-differential equation and obtain a tight lower bound for the American option price. Secondly, our method allows to disentangle the contributions of jumps and diffusion for the early exercise premium. Finally, using American-style options on the S&P 100 index from January 2007 until December 2012, we estimate various hyper-exponential specifications and investigate the implications for option pricing and jump-diffusion disentanglement. We find that jump risk accounts for a large part of the early exercise premium.