scholarly journals Evaluation of options portfolios for exchange rate hedges

2021 ◽  
Vol 21 (1) ◽  
pp. 406
Author(s):  
Miguel Jiménez-Gómez ◽  
Natalia Acevedo-Prins ◽  
Miguel Rojas-López
Keyword(s):  
Exchange Rate ◽  
Wiener Process ◽  
Hedging Strategy ◽  
Hedging Strategies ◽  
Financial Options ◽  
Exchange Risk ◽  
Long Call ◽  
Traditional Strategy

<p><span>In this paper evaluate six exchange rate hedging strategies with financial options from the OTC market in Colombia. Three hedging strategies for importers and three for exporters were raised. The coverage for importers was carried out with the traditional strategy of long call, bull call spread and bull put spread, the last two correspond to options portfolios. the coverage for importers was carried out with the traditional strategy of long put, bear call spread and bear put spread, the last two correspond to options portfolios. to determine the best hedging strategy, the currency price was modeled with a Wiener process and the VaR for the six covered scenarios was calculated and compared with the VaR of the uncovered scenario. The results shown by the six hedging strategies manage to mitigate the exchange risk, but the most efficient strategies are the traditional ones for both importers and exporters.</span></p>

Determinants of corporate foreign exchange risk hedging

2014 ◽  
Vol 40 (2) ◽  
pp. 176-188 ◽  
Author(s):  
Lee-Lee Chong ◽  
Xiao-Jun Chang ◽  
Siow-Hooi Tan
Keyword(s):  
Exchange Rate ◽  
Descriptive Analysis ◽  
Financial Derivatives ◽  
Content Type ◽  
Risk Hedging ◽  
Financial Firms ◽  
Hedging Strategies ◽  
Factors Influencing ◽  
Financial Hedging ◽  
Exchange Risk

Purpose – The purpose of this study is to delineate the factors influencing the use of financial derivatives by non-financial firms in managing their exchange rate exposure. In total, 219 non-financial firms are surveyed in regard to their financial hedging decision. Design/methodology/approach – This study is conducted via a survey and the questionnaires were sent to the treasurers and financial controller of the firms. Descriptive analysis is employed to assess the profiles of the respondents. Then, factor analysis is carried out to determine the factors influencing the use of financial derivatives in Malaysia. Findings – The results indicate that the hedging decision of non-financial firms is influenced by their assertive level toward the market and regulators and also how flexible they are for derivative instruments. The intellectual capability that firms acquire to perform hedging strategies is also vital in influencing them to make hedging decision. Practical implications – The insights of this survey would assist and prepare firms to hedge their exchange rate risk by employing financial derivatives. Knowing the influences of firms' adoption of currency derivatives would allow policy makers to formulate their policies in boosting the liquidity of Malaysian derivative market. Originality/value – This study presents findings on the factors influencing the execution of financial hedging by non-financial firms in Malaysia. Survey data are used to seek for the feedback from the market players in order to provide empirical evidence on the corporate use of financial hedging.

scholarly journals Is gold a safe haven for the dynamic risk of foreign exchange?

2021 ◽  
Vol 7 (1) ◽  
Author(s):  
Kuan-Min Wang ◽  
Thanh-Binh Nguyen Thi ◽  
Yuan-Ming Lee
Keyword(s):  
Exchange Rate ◽  
Foreign Exchange ◽  
Safe Haven ◽  
Dynamic Hedging ◽  
Exchange Rate Fluctuations ◽  
Hedging Strategies ◽  
Long Run ◽  
Exchange Risk ◽  
Short Run ◽  
The Government

AbstractThis paper uses the panel data of 15 countries from 2009 to 2020 to construct the time-varying parameter panel vector error correction model for testing the hypothesis of dynamic hedging characteristics of gold on exchange rate. As the existing literature has never considered that the foreign exchange risk hedged by gold is dynamic, this study can fill the research gap in this area. The empirical results show that: First, gold can partly hedge against the depreciation of the currency in the long run; second, gold is unable to hedge against the risk of the exchange rate when considering dynamic hedging effects in the short run; third, when facing unexpected shocks, the impulse response shows that the gold returns have reversible reactions compared to exchange rate fluctuations; therefore, gold can regard as a safe haven for foreign exchange markets; Finally, the government, as well as investors should always be concerned about these dynamic risks and formulate effective hedging strategies to control the currency uncertainty.

scholarly journals Currency hedging strategy using barrier options in the colombian market

2020 ◽  
Vol 20 (3) ◽  
pp. 1634
Author(s):  
Mariana Arango-Franco ◽  
Miguel Jiménez-Gómez ◽  
Natalia Acevedo-Prins
Keyword(s):  
Monte Carlo Simulation ◽  
Monte Carlo ◽  
Exchange Rate ◽  
Local Market ◽  
Exotic Options ◽  
Barrier Options ◽  
Hedging Strategy ◽  
Currency Hedging ◽  
Exchange Risk ◽  
Barrier Type

<p><span>One of the main problems for the growth of the Colombian market is the short variety of investment instruments found in the local market. In this way, an exchange rate hedging strategy is proposed using exotic options, specifically, barrier-type options. These types of options are not offered in the Colombian market. Monte Carlo simulation is used to determine the effect that the hedging strategy has on currency risk. From the results, it is concluded that the exchange risk is decreased with the hedging strategy because the 5th and 95th percentiles are lower than in the scenario without hedging. Finally, the code that was used to model the barrier options is explained.</span></p>

Hedging of Variable Annuities under Basis Risk

2020 ◽  
Vol 14 (2) ◽  
Author(s):  
Jan Bauer
Keyword(s):  
Financial Market ◽  
Negative Impact ◽  
Mathematical Finance ◽  
Insurance Company ◽  
Hedging Strategy ◽  
Variable Annuities ◽  
Basis Risk ◽  
Hedging Strategies ◽  
Cross Hedging ◽  
Geometric Brownian Motions

AbstractI study dynamic hedging for variable annuities under basis risk. Basis risk, which arises from the imperfect correlation between the underlying fund and the proxy asset used for hedging, has a highly negative impact on the hedging performance. In this paper, I model the financial market based on correlated geometric Brownian motions and analyze the risk management for a pool of stylized GMAB contracts. I investigate whether the choice of a suitable hedging strategy can help to reduce the risk for the insurance company. Comparing several cross-hedging strategies, I observe very similar hedging performances. Particularly, I find that well-established but complex strategies from mathematical finance do not outperform simple and naive approaches in the context studied. Diversification, however, could help to reduce the adverse impact of basis risk.

scholarly journals Precious metals–exchange rate volatility transmissions and hedging strategies

2010 ◽  
Vol 19 (4) ◽  
pp. 633-647 ◽  
Author(s):  
Shawkat M. Hammoudeh ◽  
Yuan Yuan ◽  
Michael McAleer ◽  
Mark A. Thompson
Keyword(s):  
Exchange Rate ◽  
Exchange Rate Volatility ◽  
Precious Metals ◽  
Hedging Strategies

Equity-linked executive compensation, hedging and foreign exchange exposure: Australian evidence

2019 ◽  
Vol 45 (1) ◽  
pp. 72-93
Author(s):  
Blake Loriot ◽  
Elaine Hutson ◽  
Hue Hwa Au Yong
Keyword(s):  
Risk Management ◽  
Exchange Rate ◽  
Executive Compensation ◽  
Foreign Exchange ◽  
Jel Classification ◽  
Foreign Exchange Risk ◽  
Exchange Rate Movements ◽  
Exchange Risk ◽  
Foreign Exchange Exposure ◽  
Exchange Risk Management

Using a sample of 268 Australian firms over the period 2009–2014, we examine the relation between the equity-linked compensation (shares and options) of Australian executives – CEOs, CFOs and directors – and firms’ foreign exchange hedging programmes. We find that the greater the number of shares held by CEOs, the higher its exposure to exchange rate movements. While this suggests that remuneration in the form of shares has a critical downside, we also find evidence for a more positive and important role in foreign exchange risk management for the share- and option-related incentives provided to CFOs. JEL Classification: G32, G15, F31

Emerging market currency risk exposure: evidence from South Africa

2020 ◽  
Vol 21 (2) ◽  
pp. 159-179
Author(s):  
Mashukudu Hartley Molele ◽  
Janine Mukuddem-Petersen
Keyword(s):  
South Africa ◽  
Exchange Rate ◽  
Foreign Exchange ◽  
Factor Model ◽  
Five Factor Model ◽  
Risk Exposure ◽  
Foreign Exchange Risk ◽  
Content Type ◽  
Exchange Risk ◽  
Three Factor

Purpose The purpose of this paper is to examine the level of foreign exchange exposure of listed nonfinancial firms in South Africa. The study spans the period January 2002 and November 2015. Foreign exchange risk exposure is estimated in relation to the exchange rate of the South African Rand relative to the US$, the Euro, the British Pound and the trade-weighted exchange rate index. Design/methodology/approach The study is based on the augmented-market model of Jorion (1990). The Jorion (1990) is a capital asset pricing model-inspired framework which models share returns as a function of the return on the market index and changes in the exchange rate factor. The market risk factor is meant to discount the effect of macroeconomic factors on share returns, thus isolating the foreign exchange risk factor. In addition, the study further added the size, value, momentum, investment and profitability risk factors in line with the Fama–French three-factor model, Carhart four-factor model and the Fama–French five-factor model to account for the fact that equity capital markets in countries such as South Africa are known to be partially segmented. Findings Foreign exchange risk exposure levels were estimated at more than 40% for all the proxy currencies on the basis of the standard augmented market model. However, after controlling for idiosyncratic factors, through the application of the Fama–French three-factor model, the Carhart four-factor model and the Fama–French five-factor model, exposure levels were found to range between 6.5 and 12%. Research limitations/implications These results indicate the importance of controlling for the effects of idiosyncratic facto0rs in the estimation of foreign exchange risk exposure in the context of emerging markets of Sub-Saharan Africa (SSA). Originality/value This is the first study to apply the Fama–French three-factor model, Carhart four-factor model and the Fama–French five-factor model in the estimation of foreign exchange exposure of nonfinancial firms in the context of a SSA country. These results indicate the importance of controlling for the effects of idiosyncratic factors in the estimation of foreign exchange risk exposure in the context of emerging markets.

scholarly journals Precious Metals-Exchange Rate Volatility Transmissions and Hedging Strategies

2009 ◽  
Author(s):  
Shawkat M. Hammoudeh ◽  
Yuan Yuan ◽  
Mark A. Thompson ◽  
Michael McAleer
Keyword(s):  
Exchange Rate ◽  
Exchange Rate Volatility ◽  
Precious Metals ◽  
Hedging Strategies

scholarly journals ON THE PROFIT AND LOSS DISTRIBUTION OF DYNAMIC HEDGING STRATEGIES

1999 ◽  
Vol 02 (02) ◽  
pp. 131-152 ◽  
Author(s):  
SERGEI ESIPOV ◽  
IGOR VAYSBURD
Keyword(s):  
Monte Carlo ◽  
Probability Distribution ◽  
Present Value ◽  
Hedging Strategy ◽  
Loss Distribution ◽  
Time Dynamics ◽  
Hedging Strategies ◽  
Black Scholes ◽  
Risk Neutral ◽  
Stop Loss

Hedging a derivative security with non-risk-neutral number of shares leads to portfolio profit or loss. Unlike in the Black–Scholes world, the net present value of all future cash flows till maturity is no longer deterministic, and basis risk may be present at any time. The key object of our analysis is probability distribution of future P & L conditioned on the present value of the underlying. We consider time dynamics of this probability distribution for an arbitrary hedging strategy. We assume log-normal process for the value of the underlying asset and use convolution formula to relate conditional probability distribution of P & L at any two successive time moments. It leads to a simple PDE on the probability measure parameterized by a hedging strategy. For risk-neutral replication the P & L probability distribution collapses to a delta-function at the Black–Scholes price of the contingent claim. Therefore, our approach is consistent with the Black–Scholes one and can be viewed as its generalization. We further analyze the PDE and derive formulae for hedging strategies targeting various objectives, such as minimizing variance or optimizing distribution quantiles. The developed method of computing the profit and loss distribution for a given hedging scheme is applied to the classical example of hedging a European call option using the "stop-loss" strategy. This strategy refers to holding 1 or 0 shares of the underlying security depending on the market value of such security. It is shown that the "stop-loss" strategy can lead to a loss even for an infinite frequency of re-balancing. The analytical method allows one to compute profit and loss distributions without relying on simulations. To demonstrate the strength of the method we reproduce the Monte Carlo results on "stop-loss" strategy given in Hull's book, and improve the precision beyond the limits of regular Monte-Carlo simulations.

scholarly journals Diapause is not selected as a bet-hedging strategy in insects: a meta-analysis of reaction norm shapes

2019 ◽  
Author(s):  
Jens Joschinski ◽  
Dries Bonte
Keyword(s):  
Climate Change ◽  
Phenotypic Plasticity ◽  
Meta Analysis ◽  
Reaction Norm ◽  
Geographic Range ◽  
Bet Hedging ◽  
Hedging Strategy ◽  
Apparent Lack ◽  
Environmental Predictability ◽  
Hedging Strategies

AbstractMany organisms escape from lethal climatological conditions by entering a resistant resting stage called diapause, which needs to be optimally timed with seasonal change. As climate change exerts selection pressure on phenology, the evolution of mean diapause timing, but also of phenotypic plasticity and bet-hedging strategies is expected. Especially the latter as a strategy to cope with unpredictability is little considered in the context of climate change.Contemporary patterns of phenological strategies across a geographic range may provide information about their evolvability. We thus extracted 458 diapause reaction norms from 60 studies. First, we correlated mean diapause timing with mean winter onset. Then we partitioned the reaction norm variance into a temporal component (phenotypic plasticity) and among-offspring variance (diversified bet-hedging) and correlated this variance composition with predictability of winter onset. Mean diapause timing correlated reasonably well with mean winter onset, except for populations at high latitudes, which apparently failed to track early onsets. Variance among offspring was, however, limited and correlated only weakly with environmental predictability, indicating little scope for bet-hedging. The apparent lack of phenological bet-hedging strategies may pose a risk in a less predictable climate, but we also highlight the need for more data on alternative strategies.

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