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Asymmetric hedging of the corporate terms of trade
Author(s) -
Bowden Roger,
Zhu Jennifer
Publication year - 2006
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.20232
Subject(s) - hedge , downside risk , economics , profit margin , margin (machine learning) , welfare , foreign exchange , value (mathematics) , price risk , risk management , financial economics , econometrics , microeconomics , monetary economics , mathematics , computer science , futures contract , finance , portfolio , market economy , ecology , machine learning , biology , statistics
Risk management techniques such as value at risk and conditional value at risk focus attention on protecting the downside exposures without penalizing the upside exposures. The implied welfare functions are equivalent to an otherwise risk neutral agent with a put option exposure on the downside. The correspondence can be exploited to design smoother loss measures and numerically based solutions for optimal hedge ratios. A statistically well‐adapted hedge object for the firm is the corporate terms of trade, which balances up output and expense prices as a single index related to the net profit margin. The methods are applied to the NZ dairy industry to derive optimal foreign exchange forwards based hedges. It is not always optimal to rely solely on forward discounts or premiums. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:1059–1088, 2006