This study analysis, the importance of diversification as a hedging instrument in currency devaluation. It elaborates the non-conventional way of hedging i.e. diversification without using conventional hedging instrument. Optimal Hedge ratios are estimated using Minimum Variance approach proposed by Ederington (1979). Multivariate GARCH, Diagonal Baba Angel Kraft and Kroner (DBEKK) model is employed to estimate Optimal Hedge Ratios (OHR). Two phases ofgross portfolios haven been considered in respect of Pakistan based on political parties regimes i.e. from 2010-2012 and 2013-2015. The exchange rate of Dollar (USD), Euro, Great Britain Pound (GBP), Japanese Yen (JPY) & Chinese Yuan (CHY) in terms of Pakistani rupee are taken as being the reserve and international currencies. Daily data of the currencies from Jan 2010- July 2015 are collected. The gross portfolios are further segregated in various portfolios for in-depth analysis and identifying the best portfolio having higher Hedge reduction for currency devaluation. Overall it’s concluded that portfolios including CHY have higher Risk Reduction percentages. Thus CHY along EURO and JPY should be kept in liquid asset to tackle the problem of currency devaluation. Supervisor:- Dr. Saud Ahmed Khan