Currency risks hedging for major and minor currencies: constant hedging versus speculative hedging

Abstract

Focusing on the recent experience of major and minor currencies, this study examines the effectiveness of constant hedge and speculative hedge respectively with the objective of identifying whether there are any significant differences between both hedges. Our finding is that the speculative hedge is very slightly more effective than the constant hedge in reducing the currency risk. This supports that the speculative hedge about major currencies can be a relevant hedging tool. The analysis also shows that our multiple currency futures hedge can be a good hedging instrument for some minor currencies such as Cyprus pound.

Relevance of Exchange Rates on the Trade Imbalance in the Eurozone

“…All single variables are tested for unit roots and co-integration to check out the long-run equilibrium relations in the fashion of Choi (2010). Most of them are found to be the first difference stationary in the augmented Dickey-Fuller and the Phillips-Parron tests while they are not co-integrated in Engle-Granger test in Appendix 1.…”

Dominant Currency and Value-Added Exports

“…Also, it is argued that changes in the value of dominant currencies can affect the global trade as international prices are set in just a few currencies. Choi (2017) distinguishes the value and volume effects of major currencies which are defined as the currency traded in very liquid markets (Choi, 2010) from those of other currencies. A depreciation of dominant currencies to non-dominant currencies increases imports in the periphery countries with an increase in exports to dominant currency markets, thus leading to an increase in global trade, while an appreciation of dominant currencies negatively impacts global exports and trade.…”