Open AccessHedging foreign exchange rate risk: Multi-currency diversification
Author(s) -
Susana ÁlvarezDíez,
Eva Alfaro-Cid,
Matilde O. Fernández-Blanco
Publication year - 2016
Publication title -
european journal of management and business economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.691
H-Index - 16
eISSN - 2444-8494
pISSN - 2444-8451
DOI - 10.1016/j.redee.2015.11.003
Subject(s) - cvar , diversification (marketing strategy) , foreign exchange risk , hedge , currency , expected shortfall , market neutral , econometrics , value at risk , economics , business , risk management , hedge fund , monetary economics , finance , ecology , marketing , biology
This article proposes a multi-currency cross-hedging strategy that minimizes the exchange risk. The use of derivatives in small and medium-sized enterprises (SMEs) is not common but, despite its complexity, can be interesting for those with international activities. In particular, the reduction in the exchange risk borne through the use of natural multi-currency cross-hedging is measured, considering Conditional Value-at-Risk (CVaR) and Value-at-Risk (VaR) for measuring market risk instead of the variance. CVaR is minimized using linear programmes, while a multiobjective genetic algorithm is designed for minimizing VaR, considering two scenarios for each currency. The results obtained show that the optimal hedge strategy that minimizes VaR is different from the minimum CVaR hedge strategy. A very interesting point is that, just by investing in other currencies, a significant risk reduction in VaR and CVaR can be obtained