Evaluating Hedging Effectiveness under Two Models
Date Issued
2008
Date
2008
Author(s)
Huang, Fu-Hsien
Abstract
This article uses two models to evaluate hedging effectiveness for different hedging strategies. The models are the minimum-variance model and the Sharpe-ratio model. The hedging strategies are full hedge, model-based hedge, and selective hedge. Moreover, the overall period is divided into four subperiods, and the out-of-sample test is used. The results for the hedging effectiveness of minimum-variance model show that hedging by using forwards contracts can really reduces foreign exchange risk. Using selective hedge is less effective than using model-based hedge and naive hedge. From the results for the hedging effectiveness of the Sharpe-ratio model, using foreign exchange forwards to hedge is not able to improve the risk-return performance in general.
Subjects
currency hedge
hedging effectiveness
minimum-variance model
Sharpe-ratio model
hedging strategy
Type
thesis
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