An Analysis of Optimal Hedging Strategy for Currency Exchange Market
Date Issued
2012
Date
2012
Author(s)
Chen, Szu-Hua
Abstract
While several studies have indicated that currency futures contracts can effectively minimize foreign exchange risk, few studies have discussed cross-hedging strategies using other assets. Gold is known as its monetary property
and anti-cyclical nature. Therefore, we try to add gold and its futures into our currency exchange hedging strategies to see whether hedging effectiveness would be improved or not. We focus on the hedging strategies of six main foreign exchange markets: Australian dollar (AUD), Canadian dollar
(CAD), Swiss franc (CHF), Euro (EUR), British pound (GBP), and Japanese yen (JPY). We compare the hedging effectiveness of five hedging strategies under three different empirical models: OLS, GARCH, and DCC-GARCH.Using daily data from 5 January 1999 to 30 March 2012, we find three main
results: (1) Performance of hedging strategies using currency exchange futures is better than those using gold or its futures. (2) There’s no significant difference on hedging effectiveness between single-asset and multiple-asset portfolio hedging strategies. (3) The hedging effectiveness of OLS model is better than GARCH model and DCC-GARCH model on average.
Subjects
currency exchange hedging
gold
optimal hedge ratio
cross hedging
Type
thesis
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