scholarly journals Dynamic Currency Futures and Options Hedging Model

2019 ◽  
Vol 2019 ◽  
pp. 1-11
Author(s):  
Xing Yu ◽  
Yanyin Li ◽  
Zhongkai Wan
Keyword(s):  
Optimization Method ◽  
Risk Exposure ◽  
Closed Form Solutions ◽  
Currency Futures ◽  
Dynamic Setting ◽  
Hedging Strategies ◽  
Competitive Firm ◽  
Futures And Options ◽  
Hedging Problem ◽  
Options Hedging

In this paper, we consider a risk averse competitive firm that adopts currency futures and options for hedging purpose. Based on the assumption of unbiased markets of currency futures and options, we propose the optimal hedging model in dynamic setting. By using two-stage optimization method, we prove that it is desirable for the prudent enterprise to buy exchange rate options to hedge currency risk. Furthermore, we derive the closed-form solutions of the multiperiod hedging problem with the quadratic utility function. We investigate an empirical study incorporated into GARCH-t prediction on the efficiency of hedging with currency futures and options. The empirical results demonstrate that hedging with currency futures and options can reduce the silver export firm’s risk exposure. Profits and the effective boundaries are compared in three cases: hedging with futures and options synchronously, only with futures and without any hedge. The results of multiple comparisons among different hedging strategies show that hedging with linear and nonlinear derivatives is advisable for the export firm.

Shaping the Risk

2021 ◽  
pp. 299-314
Author(s):  
Andrew C. A. Elliott
Keyword(s):  
Financial Engineering ◽  
Financial Risks ◽  
Board Game ◽  
The Past ◽  
Financial Difficulties ◽  
Hedging Strategies ◽  
Futures And Options ◽  
Overall Risk

The board game backgammon illustrates that we can control the effects of risk by understanding chances, controlling our exposure to risk, and attending to the preparation of our responses. If we understand the risks we face in a financial context, hedging strategies can allow us to shape the overall risk by offsetting some or all of it, but this comes at a price. Financial futures and options are some of the tools that allow financial risks to be shaped in creative ways. Where risks are poorly understood, though, these financial engineering approaches may not always be effective, and have in the past led to financial difficulties.

Weather derivatives to mitigate meteorological risks in tourism management: An empirical application to celebrations of Comunidad Valenciana (Spain)

2019 ◽  
pp. 135481661989075
Author(s):  
Andrea Martínez Salgueiro ◽  
Maria-Antonia Tarrazon-Rodon
Keyword(s):  
Risk Exposure ◽  
Autonomous Community ◽  
Weather Derivatives ◽  
Basis Risk ◽  
Empirical Application ◽  
Simulation Techniques ◽  
Tourism Management ◽  
Hedging Strategies ◽  
Index Value ◽  
Case Basis

This article explores the possibility of implementing weather derivatives in cultural events through an empirical application to celebrations of Comunidad Valenciana (Spain). Temperature- and rainfall-based options geared to the three counties of this Autonomous Community are proposed to mitigate the risk exposure of this event. First, the contracts are priced through the Index Value Simulation and Daily Simulation techniques, which rely on Monte Carlo simulations. Next, they are used to design realistic hedging strategies, which are evaluated under different meteorological scenarios. The degree of geographical basis risk affecting this region, as measured by the root mean square error, is also assessed since it is a common issue refraining the application of weather derivatives. The outcomes attained emphasize the high hedging potential of the suggested tools and indicate the appropriateness of considering, on a case-by-case basis, the possibility of using a combination of derivatives geared to nearby stations as a solution to mitigate basis risk exposure.

LOCAL RISK-MINIMIZATION UNDER MARKOV-MODULATED EXPONENTIAL LÉVY MODEL

2015 ◽  
Vol 18 (05) ◽  
pp. 1550033
Author(s):  
OLIVIER MENOUKEU-PAMEN ◽  
ROMUALD MOMEYA
Keyword(s):  
Regime Switching ◽  
Risk Minimization ◽  
Martingale Representation ◽  
Option Hedging ◽  
Hedging Strategies ◽  
Local Risk ◽  
Hedging Problem ◽  
Markov Modulated ◽  
Martingale Representation Theorem ◽  
Minimization Approach

In this paper, the option hedging problem for a Markov-modulated exponential Lévy model is examined. We use the local risk-minimization approach to study optimal hedging strategies for Europeans derivatives when the price of the underlying is given by a regime-switching Lévy model. We use a martingale representation theorem result to construct an explicit local risk minimizing strategy.

The relationship between trading volume and exchange rate volatility: linear or nonlinear?

2019 ◽  
Vol 15 (1) ◽  
pp. 19-38
Author(s):  
Satish Kumar
Keyword(s):  
Granger Causality ◽  
Trading Volume ◽  
Causal Relation ◽  
Futures Market ◽  
Content Type ◽  
Currency Futures ◽  
Information Hypothesis ◽  
Hedging Strategies ◽  
Linear And Nonlinear ◽  
Mixture Of Distribution Hypothesis

PurposeThe purpose of this paper is to examine the linear and nonlinear relations between returns volatility and trading volume for the Indian currency futures market.Design/methodology/approachTo examine the contemporaneous relation between returns volatility and volume, the author uses the generalized method of moment estimator. For the linear causal relation, the author makes use of Granger (1969) bivariate vector autoregression model. The author tests for nonlinear Granger causality between returns volatility and trading volume based on a modified version of the Baek and Brock (1992) nonparametric technique developed by Hiemstra and Jones (1994).FindingsThe results indicate a negative contemporaneous relation between returns volatility and trading volume; therefore, the mixture of distribution hypothesis is not supported. The results of both linear and nonlinear Granger causality between futures returns volatility and trading volume indicate a significant bidirectional relation between the two variables lending support to the sequential arrival of information hypothesis. The results are robust to divergence of opinions as proxied by open interest.Practical implicationsThe findings of this paper are important for the participants in the market and regulators. The participants in the market require alternatives to diversify their risk. The significant causal relation between returns volatility and trading volume implies that trading volume helps predict the futures prices and should lead to creation of more reliable hedging strategies for investment purposes. Furthermore, it may interest the regulators who need to decide upon the appropriateness of their policies in the currency futures market.Originality/valueTo the best of the author’s knowledge, there is no study that investigates the forecast ability of trading volume to futures returns volatility in an emerging currency futures market. Given that currency futures market is one of the largest markets in the world, and Indian rupee has seen wide fluctuations in the recent years, it seems exciting to explore the price–volume relation in the Indian currency futures market.

VAR-BASED OPTIMAL PARTIAL HEDGING

2013 ◽  
Vol 43 (3) ◽  
pp. 271-299 ◽  
Author(s):  
Jianfa Cong ◽  
Ken Seng Tan ◽  
Chengguo Weng
Keyword(s):  
Financial Market ◽  
Value At Risk ◽  
Risk Measure ◽  
Market Model ◽  
Risk Exposure ◽  
Hedging Strategy ◽  
Quantile Hedging ◽  
Hedging Strategies ◽  
Optimal Hedging ◽  
Partial Hedging

AbstractHedging is one of the most important topics in finance. When a financial market is complete, every contingent claim can be hedged perfectly to eliminate any potential future obligations. When the financial market is incomplete, the investor may eliminate his risk exposure by superhedging. In practice, both hedging strategies are not satisfactory due to their high implementation costs, which erode the chance of making any profit. A more practical and desirable strategy is to resort to the partial hedging, which hedges the future obligation only partially. The quantile hedging of Föllmer and Leukert (Finance and Stochastics, vol. 3, 1999, pp. 251–273), which maximizes the probability of a successful hedge for a given budget constraint, is an example of the partial hedging. Inspired by the principle underlying the partial hedging, this paper proposes a general partial hedging model by minimizing any desirable risk measure of the total risk exposure of an investor. By confining to the value-at-risk (VaR) measure, analytic optimal partial hedging strategies are derived. The optimal partial hedging strategy is either a knock-out call strategy or a bull call spread strategy, depending on the admissible classes of hedging strategies. Our proposed VaR-based partial hedging model has the advantage of its simplicity and robustness. The optimal hedging strategy is easy to determine. Furthermore, the structure of the optimal hedging strategy is independent of the assumed market model. This is in contrast to the quantile hedging, which is sensitive to the assumed model as well as the parameter values. Extensive numerical examples are provided to compare and contrast our proposed partial hedging to the quantile hedging.

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