Hedging foreign exchange rate risk: Multi-currency diversification

Álvarez‐Díez, Susana; Alfaro-Cid, Eva; Fernández-Blanco, Matilde O.

doi:10.1016/j.redee.2015.11.003

Cited by 24 publications

(11 citation statements)

References 11 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…At present, there is hardly any study that examines the demand for FCAs, largely due to the unavailability of published data on i F . Some studies on foreign currency deposits have applied the currency substitution and foreign currency demand framework (Rodriguez and Turner, 2003;Kapounek et al, 2016), the utility framework (Li, 2011) and the value-at-risk framework (Alvarez-Diez et al, 2016). The FCA is not a substitute for domestic currency simply because FCA depositors cannot withdraw physical cash out of the matured deposits.…”

Section: Introductionmentioning

confidence: 99%

Banking on foreign currency accounts: evidence from Malaysia

Ong

2018

IJBM

View full text Add to dashboard Cite

Purpose The purpose of this paper is to study how the foreign currency account (FCA) is affected by the domestic fixed deposit (FD) rate, the FCA rate, the expected exchange rate and exchange rate risk. Design/methodology/approach This paper analyses the causal relationship between the domestic FD rate, the FCA rate, the expected exchange rate on a set of foreign currency deposits and exchange rate volatility, based on the theory of portfolio choice. Based on the theory, the panel vector autoregressive regression of fully modified ordinary least squares and dynamic ordinary least squares are modelled. Findings There is no cointegrating relationship for the three-month FCA deposits, the domestic FD rate, the FCA rate and the expected exchange rate. Only the six-month FCA business deposits are affected by the domestic FD rate, the FCA rate and the expected exchange rate. The FCA depositors are not affected by exchange rate volatility. Research limitations/implications This study is conducted based on the FCA rate quoted by the leading commercial banks in Malaysia, Maybank. Thus, the FCA rate is used as a proxy for the FCA rate of commercial banks in Malaysia. Originality/value Individual depositors have to save in more than the three-month FCA to realise their expected return. For individuals, the FCA deposit is not an alternative choice to domestic FD. Exporters may use the FCA deposit to finance their foreign purchases to save the cost of foreign exchange conversion but it is still not an appropriate hedging tool against foreign exchange fluctuations as compared to the existing forward foreign exchange facility.

show abstract

Section: Introductionmentioning

confidence: 99%

Banking on foreign currency accounts: evidence from Malaysia

Ong

2018

IJBM

View full text Add to dashboard Cite

show abstract

“…Kroner and Sultan (1993) use an error-correction model together with the GARCH model, Cho et al (2019) use DCC, Ku et al (2007) use constant conditional correlation and DCC models in addition to their OLS and error-correction models, Caporin et al (2014) use DCC and several other multivariate GARCH models and Lien et al (2002) add a constant-correlation vector GARCH model as well. Alvarez-Diez et al (2016) have gone a step further when analysing the hedging strategy as they focus not on volatility but on the value-at-risk and conditional value-at-risk of the portfolios.…”

Section: Related Literaturementioning

confidence: 99%

Optimal currency hedge and the carry trade

Filipozzi

Harkmann

2020

RAF

View full text Add to dashboard Cite

Purpose This paper aims to investigate the efficiency of different hedging strategies for an investor holding a portfolio of foreign currency bonds. Design/methodology/approach The simplest strategies of no hedge and fully hedged are compared with the more sophisticated strategies of the ordinary least squares (OLS) approach and the optimal hedge ratios found by the dynamic conditional correlation-generalised autoregressive conditional heteroskedasticity approach. Findings The sophisticated hedging strategies are found to be superior to the simple strategies because they lower the portfolio risk in domestic currency terms and improve the Sharpe ratios for multi-asset portfolios. The analyses also show that both the OLS and dynamic hedging strategies imply holding a limited carry position by being long in high-yielding currencies but short in low-yielding currencies. Originality/value The performance of multi-currency portfolios is examined using more realistic assumptions than in the previous literature, including a weekly frequency and a constraint of no short selling. Furthermore, carry trades are shown to be part of an optimal portfolio.

show abstract

“…Internationalization, however, also exposes SMEs to exchange rate risk (Bartram, 2008;Bartram, Brown, & Minton, 2010) for the basics of exchange rate risk). 11 Over the last decades, large and persistent fluctuations in exchange rates have been a significant risk for companies worldwide, particularly for firms with foreign currency-based activities such as imports and exports (Álvarez-Díez, Alfaro-Cid, & Fernández-Blanco, 2016). Increased exchange rate risk might hamper SMEs ' internationalization abilities.…”

Section: Smes Hedging Of Exchange Rate Riskmentioning

confidence: 99%

Management of Exchange Rate Risk in SMEs

Badshah

Borgersen

2020

SJOM

View full text Add to dashboard Cite

Exchange rate fluctuations represent a challenge for the internationalization of all firms, both big and small. This paper reflects on two aspects of the exchange rate challenge - (i) the exchange rate pass-through and (ii) hedging of exchange rate risk and how SMEs manage these two aspects of exchange rate risk. The exchange rate challenges that SMEs face might differ from the risks larger firms are exposed to, and their management of the risks might vary. In family-owned SMEs, longer planning horizons than listed firms might imply a weaker exchange rate pass-through, while smaller financial buffers might pull pass-through rules in the opposite direction for the same SMEs. When considering hedging, the paper argues for both operational hedging and external hedging to represent a management challenge for SMEs, pushing the exchange rate risk towards the forefront of the factors hampering internationalization among SMEs.

show abstract

Hedging foreign exchange rate risk: Multi-currency diversification

Cited by 24 publications

References 11 publications

Banking on foreign currency accounts: evidence from Malaysia

Banking on foreign currency accounts: evidence from Malaysia

Optimal currency hedge and the carry trade

Management of Exchange Rate Risk in SMEs

Contact Info

Product

Resources

About