ADVANCED HEDGING STRATEGIES AND GLOBAL PORTFOLIO DIVERSIFICATION: AN INTEGRATED MODEL FOR RISK MITIGATION AND RETURN OPTIMIZATION IN VOLATILE MARKETS

Abstract

This article provides an in-depth analysis of the effectiveness of an integrated model for hedging and global portfolio diversification, designed to mitigate risks and optimize returns under conditions of heightened volatility in international markets. The study is motivated by the growing instability of the global economy, characterized by geopolitical shocks, persistent inflation, abrupt fluctuations in commodity prices, and significant exchange rate volatility, all of which directly affect institutional investors, corporations, and multimarket funds. The main objectives of this research were (i) to assess how the integration of derivative instruments (futures, options, and currency and commodity swaps) with geographical and sectoral portfolio diversification contributes to volatility reduction, and (ii) to propose a replicable risk management model with practical applicability for different types of investors. The methodology followed a three-stage approach: (a) a comprehensive literature review on derivatives, hedging practices, and international diversification, including contributions from leading financial authors and global consultancy reports; (b) a quantitative analysis of historical time series of exchange rates (BRL/USD) and key commodities (sugar, coffee, and soybean oil) between 2015 and 2024; and (c) comparative backtesting of portfolios with and without hedging, complemented by a case study based on SAX Trading USA’s operations, covering international contracts and risk management practices in global supply chains. The results demonstrate that systematic hedging reduced portfolio volatility by up to 35%, increased currency protection by 40%, and enhanced average annual returns by approximately 18% compared to unhedged portfolios. Furthermore, international diversification proved essential in reducing asset correlations and cushioning portfolio losses during economic stress scenarios. The study concludes that the integration of structured hedging and global diversification represents a robust and replicable approach for institutional and corporate investors, delivering measurable gains in stability, efficiency, and performance. The main contribution of this article is the presentation of a hybrid model that bridges theoretical foundations with practical evidence, offering insights applicable both to academic research and to financial market operations, and reinforcing the relevance of advanced risk management strategies in an increasingly uncertain global environment.