Evaluating Hedging Strategies of Multiple Foreign Exchanges - Case Study
Date Issued
2015
Date
2015
Author(s)
Chung, Kai-Chih
Abstract
International trade plays an important role in Taiwanese economics, which is also one of the important sources of profit to exporters in Taiwan. Thus, an exporter usually executes hedging strategies to hedge volatility of foreign exchange when trading. However, if improper operations or mistakes happen during execution, it could still make huge loss. In view of this probability, the purpose of this research, which was subdivided into four cases, was to make analyses of foreign exchange hedging strategies accurate and closer to reality. Hope that the results have more practical reference value. This research set industry to be an electronic product exporter, exchange rate to be USD/NTD, research time period to be 1.1.1995 to 12.31.2014, tool to be forward exchange which is most broadly used, and hedging time period to be 10 days, 30 days, 60 days, 90 days, and 180 days. Moreover, this research divides hedging strategies into 3 parts: hedging ratio, hedging frequency, and hedging selectivity. And constituted 8 hedging strategies to provide a more diversified and complete reference. And to evaluate the effectiveness of “risk minimization” and “reward/risk maximization”, this research used Minimum-Variance model (Johnson, 1960) and “reward difference per risk” provided by this paper respectively. Besides the best hedging strategies of cases, the results also show 2 conclusions. First, if the purpose of hedging is to minimize risk, total hedging is better than optimized hedging, fixed hedging is better than selective hedging, and entire hedging is better than segmental hedging. Second, if the purpose of hedging is to maximize the difference of reward per risk, optimized hedging is better than total hedging, selective hedging is better than fixed hedging, and segmental hedging is better than entire hedging.
Subjects
Exchange rate
Forward exchange
Foreign exchange hedging
Hedging strategy
Hedging effectiveness
Strategy performance
Type
thesis