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The Use of Forward Contracts for Hedging Currency Risk
Author(s) -
Fung HungGay,
Leung Wai K.
Publication year - 1991
Publication title -
journal of international financial management and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.818
H-Index - 37
eISSN - 1467-646X
pISSN - 0954-1314
DOI - 10.1111/j.1467-646x.1991.tb00092.x
Subject(s) - hedge , currency , forward contract , foreign exchange risk , economics , ex ante , market neutral , foreign exchange , financial economics , econometrics , monetary economics , futures contract , portfolio , ecology , macroeconomics , biology
This paper derives an optimal rule for hedging currency risk in a general utility framework. Ex ante hedging performance of the forward markets is examined using the optimal hedge ratio derived from the utility model and an optimal rule derived from another model (excess return per unit risk) suggested in the hedging literature. Results of this study indicate a naive (one‐to‐one) hedge performs similarly to the optimal hedge ratios under either model. An implication of this study is that financial managers of multinational firms should simply follow a one‐to‐one rule when hedging foreign exchange risk in the forward markets.