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Managing Exchange Rate Risk with Derivatives: An Application of the Hedge Ratio

Author

Listed:
  • Consuela-Elena Popescu

    (The Bucharest University of Economic Studies, Bucharest, Romania)

  • Georgiana Vrinceanu

    (The Bucharest University of Economic Studies, Bucharest, Romania)

  • Alexandra Horobet

    (The Bucharest University of Economic Studies, Bucharest, Romania)

  • Lucian Belascu

    (Lucian Blaga University of Sibiu, Sibiu, Romania)

Abstract

Risk management practices have become increasingly sophisticated. Derivatives have been developed and they can be widely used by economic agents in order to effectively hedge the risk, or by those who want to speculate on the evolution of prices. This study presents a hedging alternative with future contracts using an ARMA/ARIMA model. Employing five futures contracts on several exchange rates -AUD/CAD, EUR/JPY, EUR/USD, GBP/USD, RMB/USD - the actual value of the base at a future time (defined as the difference between spot rate and futures rate) can be predicted with a certain number of days until maturity. Apart from the classical calculation of the hedge rate this is another method for hedgers to use in order to reduce the volatility of their positions by trying to predict the future spot price in the currency market.

Suggested Citation

  • Consuela-Elena Popescu & Georgiana Vrinceanu & Alexandra Horobet & Lucian Belascu, 2020. "Managing Exchange Rate Risk with Derivatives: An Application of the Hedge Ratio," Business & Management Compass, University of Economics Varna, issue 3, pages 316-327.
    • Handle: RePEc:vrn:journl:y:2020:i:3:p:316-327
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    exchange rate risk; hedging; ARMA; futures; stock exchange;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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