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Operational Hedging as an Alternative to Financial Hedging in the Absence of Sophisticated Financial Markets

Author

Listed:
  • Moosa, Imad A.

    (Department of Accounting and Finance, Monash University)

  • McDonald, Brien

    (La Trobe University, Department of Economics and Finance)

Abstract

In this paper it is demonstrated that the operational hedging techniques of risk sharing and currency collars can be as effective as forward hedging in reducing transaction exposure to foreign exchange risk. For this purpose we use historical data on the exchange rates of the Kuwaiti dinar against five major currencies. It is shown that the effectiveness of these hedging techniques depends on some parameters, specifically the upper and lower values of the exchange rate in the case of a currency collar and the range within which foreign currency cash flows are converted at the market rate in the case of a risk sharing agreement. It is concluded that these operational hedging techniques can be resorted to as an alternative to financial hedging in the absence of sophisticated financial markets.

Suggested Citation

  • Moosa, Imad A. & McDonald, Brien, 2005. "Operational Hedging as an Alternative to Financial Hedging in the Absence of Sophisticated Financial Markets," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 58(2), pages 241-254.
    • Handle: RePEc:ris:ecoint:0114
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    Cited by:

    1. Moosa Imad, 2011. "Risk Transfer Arrangements as a Hedging Device with Evidence from the Kuwaiti Dinar-British Pound Market," Review of Middle East Economics and Finance, De Gruyter, vol. 7(2), pages 1-18, September.

    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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