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Is there a need for hedging exposure to foreign exchange risk?

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  • Imad Moosa

Abstract

The performance of three strategies of hedging exposure to foreign exchange risk are evaluated in terms of the ability to optimize the domestic currency value of the exposure. The results, based on data covering the exchange rates of three currencies against the US dollar, reveal that hedging or no hedging will not make any difference over a long period of time even if perfectly accurate forecasts are available. This result is attributed to the validity of the unbiased efficiency hypothesis in the long run. It is argued that if the exposure is large and non-recurring then it should be hedged by using forward contracts in preference to money market hedging. To add more flexibility to the operation in situations like this, an option hedge may be considered.

Suggested Citation

  • Imad Moosa, 2004. "Is there a need for hedging exposure to foreign exchange risk?," Applied Financial Economics, Taylor & Francis Journals, vol. 14(4), pages 279-283.
    • Handle: RePEc:taf:apfiec:v:14:y:2004:i:4:p:279-283
    DOI: 10.1080/0960310042000201219
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    References listed on IDEAS

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    1. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    2. Rogoff, Kenneth, 1999. "Monetary Models of Dollar/Yen/Euro Nominal Exchange Rates: Dead or Undead?," Economic Journal, Royal Economic Society, vol. 109(459), pages 655-659, November.
    3. Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-170, March.
    4. Rolfo, Jacques, 1980. "Optimal Hedging under Price and Quantity Uncertainty: The Case of a Cocoa Producer," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 100-116, February.
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    Cited by:

    1. Karim Ben Khediri & Didier Folus, 2010. "Does hedging increase firm value? Evidence from French firms," Applied Economics Letters, Taylor & Francis Journals, vol. 17(10), pages 995-998.
    2. Mark Manfredo & Timothy Richards, 2009. "Hedging with weather derivatives: a role for options in reducing basis risk," Applied Financial Economics, Taylor & Francis Journals, vol. 19(2), pages 87-97.
    3. Mei Qiu & Pinfold & Rose, 2015. "A currency preferential approach to international equity investment," Applied Economics, Taylor & Francis Journals, vol. 47(49), pages 5247-5261, October.
    4. Hoa Nguyen & Robert Faff, 2010. "Are firms hedging or speculating? The relationship between financial derivatives and firm risk," Applied Financial Economics, Taylor & Francis Journals, vol. 20(10), pages 827-843.
    5. Myoung Shik Choi, 2010. "Currency risks hedging for major and minor currencies: constant hedging versus speculative hedging," Applied Economics Letters, Taylor & Francis Journals, vol. 17(3), pages 305-311, February.

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