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The objective of the thesis is to develop a structured financial hedging framework that is empirically implementable and consistent with a corporate finance perspective. Value at risk provides a suitable framework for this purpose. The aversion implied in the value at risk and its generalised theory arises from a firm's concerns about contingent financial distress costs, which can be considered as the payoff of a put option written by stockholders of firms in favour of third parties. This enables the development of a hedging framework to explore how a firm's welfare might be enhanced by replacing natural exposures with hedged outcomes. An ideal hedging decision is to maximise the financial value in good times at minimal cost in terms of the generalised value at risk penalty function. In an efficient market, a fully hedged policy using forwards is generally the optimal decision, while alternatives should be taken into account where markets are not efficient. In such cases, the underlying empirical methodology should be able to detect inefficiencies and feed into the objective functions for maximising firm value. The empirical implementation is explored with a variety of econometric methodologies. These include the development of new semi-parametric or nonparametric techniques based upon wavelet analysis, as well as an incomplete forecasting algorithm. Such methods have been preferred to classical linear and stationary models, because they have broader application in an inefficient market where information is technically fuzzy and financial data may exhibit non-linearity or non-stationarity. Further decision dimensions concern exposure duration or path risk, in which individuals' perspectives of risk is time-dependent and linked to the evolution of value at risk through time. The proposed approaches find their main application in foreign exchange risk management, a topic of considerable importance and sensitivity in New Zealand. A statistically well-adapted hedge object for an exporter such as the dairy industry is the corporate terms of trade, which balances up output and expense prices as a single index related to the net profit margin. Further applications are to strategic fund management where the objective is to derive optimal foreign exchange forwards based hedges.

The Structured Hedging of Financial Value: With Applications to Foreign Exchange Risk Management