Currency Risk Hedging Research Articles

Hedging global currency risk: A dynamic machine learning approach

We propose a dynamic method to hedge foreign exchange risk of international equity portfolios. The method is based on the currency return forecasts derived from a set of alternative machine learning models, built on the main factor components of the currency return time series. To illustrate our method, we take the perspective of a US portfolio manager investing in a global equity portfolio of developing and developed economies. The analysis of several model performance indicators, back-tested on data from 27 October 2008 to 30 December 2022, allows to conclude that accurate predictions of global currency factor returns, such as those obtained with non linear machine learning models, can improve currency risk hedging of global equity portfolios.

Assessing the nexus between currency exchange rate returns, currency risk hedging and international investments: Intelligent network-based analysis

Through the exogenous growth model, the inflow of international investments promotes economic growth by the inclusion of foreign technologies in production functions and capital accumulation. But the proportional increasing outflow of international investments from emerging countries rapidly squeezes their economies. The main reasons of the massive gap between the inflow and outflow of international investments are devaluation of their home currency and inaccessibility of the foreign exchange derivatives instruments for potential currency risk hedging. The previous studies have strongly ignored the role of two-way multicurrency cross-risk hedging (MCCRH) in bilateral flows of international investments by conditioning effect of the currency returns. By considering the significance of the subject matter, it is needed to assess the interaction between two-way MCCRH, currency returns of multicurrency exchange rate returns (MCERRs) and bilateral flows of international investments, and conditional dependency of random variables of the intelligent network structure. The regression-based MLP and probabilistic Bayes intelligent neural networks represented that the two-way MCCRH and currency returns of MCERRs have a strong impact on bilateral flows of international investments in an emerging country. The constraint-based approach of the probabilistic Bayes intelligent neural network showed that the two-way MCCRH conditionally affects the bilateral flows of international investments given the percentage of currency returns of MCERRs. This study may assist policymakers and regulators to enhance currency returns and availability of foreign exchange derivatives instruments at the least cost to grab more intention of international investors for investments that will expand the economic growth of Pakistan.

Foreign investments of Japanese life insurance companies

We investigate Japanese life insurance companies’ investment returns or volatilities and their discretionary decisions on foreign portfolio investments. These decisions include the proportion of foreign investments in the companies’ proprietary investments and the currency risk hedge. We consider the “carry trade” scenario when the market favors investing in high-yield currencies by borrowing the Japanese yen. We establish three results. First, the currency hedge relates positively to the investment returns under the carry trade scenario but negatively otherwise. Second, the proportion of foreign investments relates positively to the investment returns. Third, the investment returns significantly decrease under the carry trade scenario.

Artificial neural network (ANN)-based estimation of the influence of COVID-19 pandemic on dynamic and emerging financial markets

The COVID-19 pandemic is a serious global issue destroying financial markets awfully. The proper estimation effect of COVID-19 pandemic on dynamic emerging financial markets is a big challenge due to a complex multidimensional data. However, the present study proposes a Deep Neural Network (DNN)-based multivariate regression approach with backpropagation algorithm and structural learning-based Bayesian network with constraint-based algorithm to investigate the influence of COVID-19 pandemic on the currency and derivatives markets of an emerging economy. The output shows that the COVID-19 pandemic has negatively influenced the financial markets as indicated by sharply depreciating currency value around 10 % to 12 % and reducing short-position of futures derivatives around 3 % to 5 % for currency risk hedging. The robustness estimation shows that there have probabilistic distributed between Traded Futures Derivatives Contracts (TFDC), Currency Exchange Rate (CER), and Daily Covid Cases (DCC) and Daily Covid Deaths (DCD). Moreover, the output represents that the futures derivatives market conditionally depends on the currency market volatility given percentage of COVID-19 pandemic. This study may help to policymakers of financial markets in decision-making to control CER volatility that may promote currency market stability to enhance currency market activities and boost confidence of foreign investors in extreme financial crisis circumstances.

Connectedness between Currency Risk Hedging and Firm Value: A Deep Neural Network-based Evaluation

Connectedness between Currency Risk Hedging and Firm Value: A Deep Neural Network-based Evaluation

Modelling and Forecasting of EUR/USD Exchange Rate Using Ensemble Learning Approach

Abstract The aim of the study is to obtain an accurate result from forecasting the EUR/USD exchange rate. To this end, high-performance machine learning models using CART Ensembles and Bagging method have been developed. Key macroeconomic indicators have been also examined including inflation in Europe and the United States, the index of unemployment in Europe and the United States, and more. Official monthly data in the period from December 1998 to December 2021 have been studied. A careful analysis of the macroeconomic time series has shown that their lagged variables are suitable for model’s predictors. CART Ensembles and Bagging predictive models having been built, explaining up to 98.8% of the data with MAPE of 1%. The degree of influence of the considered macroeconomic indicators on the EUR/USD rate has been established. The models have been used for forecasting one-month-ahead. The proposed approach could find a practical application in professional trading, budgeting and currency risk hedging.

ХЕДЖУВАННЯ ВАЛЮТНИХ РИЗИКІВ У МІЖНАРОДНОМУ БІЗНЕСІ З ВИКОРИСТАННЯМ МОЖЛИВОСТЕЙ МІЖНАРОДНОГО ВАЛЮТНОГО РИНКУ

The article is devoted to the study of currency risk hedging in international business. The article notes that the international foreign exchange market is the largest and fastest growing of all world markets. The characteristic features of the international currency market are substantiated and offered. It is also noted that foreign exchange transactions provide economic ties between participants located on different sides of state borders: settlements between firms from different countries for the supply of goods and services, foreign investment, international tourism and business travel. It is determined that hedging of currency risks is the protection of funds from the unfavorable movement of exchange rates, and is carried out in fixing the current value of funds by concluding an agreement on the foreign exchange market. When hedging, the risk of exchange rate changes disappears, and this makes it possible to forecast the company's activities and see the financial result, which is not distorted by exchange rate fluctuations, which will allow you to determine product prices, calculate profits, etc. The main difference between hedging and other types of transactions is that its purpose is not to generate additional profits, but to reduce the risk of potential losses, as risk reduction is almost always necessary to pay, hedging, of course, involves additional costs. Hedging is a way to improve business planning. An enterprise wishing to use this service shall pledge the specified amount, from which losses on its positions will be deducted. In today's conditions, thanks to the foreign exchange market, there is a very reliable way to hedge currency risk. This method is to fix the current value of funds by concluding agreements in this market. With hedging, the company eliminates the risk of exchange rate fluctuations, and this allows you to forecast activities and see the financial result, which is not changed by exchange rate fluctuations. Allows you to pre-determine product prices, determine profits, etc. Thus, the principle of hedging in international business is to open a currency position in a foreign currency account for future transactions to convert funds.

Investment portfolio Forex risk hedging in the international stock market

Subject. Investment management on the international financial market necessitates a special approach to foreign currency hedging. The majority of international investors fully eliminate risk associated with their foreign-exchange holdings, seeking profits only from stock price differentials. In certain circumstances, a correlation between local currency exchange rate and local stock index may provide additional opportunities for profit generation. Objectives. The aim of the study is to test the hypothesis that partial currency risk-taking may reduce the total portfolio risk and increase return on international investment. Methods. I apply the global optimization approach to calculate investment portfolios for 11 countries of the world. Each portfolio includes shares of 20–25 highly capitalized companies. Descriptive statistic methods are used to check the input data, i.e. random variable calculation, pivot tables. Investment strategy efficiency is assessed based on the Sharpe Ratio, Sortino Ratio, Treynor Ratio and Omega Ratio. Results. Currency hedge position at the rate of about 14 percent of the total portfolio value may increase investment yield by two percentage points annually on the ten-year time span. Conclusions and Relevance. Total currency risk hedge is necessary for investment in developed and developing countries that pursue the policy of regular devaluation of their national currency. Market regulators inside a particular country should take into account that a sudden devaluation of national currency may be needed, if return on the stock market is lower than that of risk-free instruments.

Spillover Effects Between Stock Prices and Exchange Rates for the Central and Eastern European Countries

This article attempts to empirically analyze the dynamic relationship and volatility spillover effects between exchange rates and stock returns of the five Central and Eastern European (CEE) countries (Hungary, Poland, the Czech Republic, Romania and Croatia) covering the period 2000–2017 by using the bivariate generalized autoregressive conditional heteroskedasticity-Baba, Engle, Kraft and Kroner (GARCH-BEKK) framework alongside with the constant and dynamic conditional correlation (CCC and DCC) models. The major findings reveal the following: bidirectional volatility spillovers between the two financial markets in Hungary, the Czech Republic and Croatia in the pre-crisis period; unidirectional spillover of volatility from the stock market to foreign exchange market for Poland during the sub-prime crisis period; unidirectional spillover of volatility from the foreign exchange market to the stock market for Hungary in the post-crisis period and Romania in the pre-crisis period; non-persistence volatility spillover between them in case of the Czech Republic, Romania and Croatia in the post-crisis period; the absence of volatility transmission from the stock market to foreign exchange market occurs in Hungary, while from the foreign exchange market to the stock market in case of Poland in the post-crisis period. We further find a short-lived but non-negligible financial contagion between stock and foreign exchange market in these countries. These empirical insights have significant implications for portfolio investments and currency risk hedging.

Bilateral Trade Gap between Bangladesh and South Korea

The prime focus of this study is to investigate the bilateral trade gap between Bangladesh and South Korea. To find the bilateral trade gap at the outset this paper will investigate total exports and imports between South Korea and Bangladesh and then this study focuses on examining the determinants of total bilateral trade during the period from 1991 to 2020. The study also investigates the strategies through which two countries can improve their bilateral trade relation and can find amicable ways to minimize trade gap. Firstly, the findings reveal that bilateral trade gap increased during the study period of last 30 years. Secondly, the study identifies some determinants namely asymmetry of output, currency risk, comparative advantage and inconsistency of trade friendly environment which led to high bilateral trade gap between the two countries. Finally, this paper suggests some policy recommendations such as hedging of currency risk, increasing Foreign Direct Investment and Research & Development allocations, as well as to create scope for maintaining Gross Domestic Product growth and to increase bilateral cooperation through deliberation amongst high governmental officials and political leaders of the two countries. A model is also developed to forecast the bilateral trade between these two countries in the foreseeable future.

Dynamic Hedging of Currency Risk in Investment Strategies

Often, investors fully hedge their portfolios for currency risk. This can lead to significant drag in performance for currencies with negative carry. However, not hedging the foreign currency exposure can lead to significant drawdowns, especially for conservative investments. In this paper, we consider a conservative, global tactical asset allocation strategy implemented in US dollar denominated securities for a hypothetical, European investor and highlight the benefits of dynamic currency hedging over static hedging. Using a parsimonious model for hedge ratio based on multiple features of merit and an explicit check for maximum allowed under-hedging, we show that a cost aware, dynamic hedging strategy can reduce the hedging costs substantially while keeping the portfolio risk within mandate specifications.

Foreign currency risk hedging and firm value in China

The objective of our study is to investigate the association between the use of foreign currency derivatives and corporate value among Chinese firms by examining listed firms’ quarterly data from 2000 to 2013. We find that Chinese firms that engage in hedging activities with derivatives to reduce their foreign exchange exposure tend to have higher corporate value. This finding is shown to be consistent through a series of robustness tests. We also find that the incidence of such effects is higher among firms with greater profitability and investment opportunities. The use of foreign currency derivatives exerts a more prominent impact on firm value when the exchange rate depreciates and when the economy is booming. However, the link between derivative use and firm value is weaker during crisis periods. Moreover, an industrial analysis demonstrates that the value-enhancing effect varies across industries.

Investment Returns and Currency Hedge for the Foreign Investments: Evidence from the Japanese Life Insurance Companies

This paper investigates the relationship between the investment returns or volatilities of the Japanese life insurance companies and their discretionary decisions on the foreign portfolio investments. These decisions include the proportion of the foreign investments in their entire proprietary investments and the currency risk hedge. We also consider the scenario: when the market prevails to invest in the high-yield currencies by borrowing the Japanese yen. We establish three important results. First, the currency hedge positively relates to the investment returns under carry trade scenario but negatively otherwise. Second, the proportion of the foreign investments positively relates to the investment returns. Third, the investment returns significantly decrease under the carry trade scenario.

The constraints of Russian market in currency risk hedging by corporations

Увеличение изменчивости основных индикаторов российских и международных финансовых рынков послужило естественным стимулом к развитию практик управления финансовыми рисками. Хеджирование с помощью операций на финансовых рынках является классическим и наиболее эффективным инструментом снижения подверженности финансовым рискам. Однако при практическом совершении операций на российском рынке компании сталкиваются с ограничениями, связанными с несовершенством финансового рынка. В настоящей работе рассмотрены ключевые ограничения, которые снижают масштаб применения производных инструментов в качестве инструментов хеджирования валютного риска промышленных компаний. В условиях наличия данных ограничений целесообразно использовать возможности так называемого естественного (внутреннего) хеджирования: управление структурой долга и активов компании в зависимости от структуры выручки и обязательств, диверсификация активов, передача риска акционерам и др.

Exchange rate movements and stock market returns in a regime-switching environment: Evidence for BRICS countries

We use a regime-switching model approach to investigate the dynamic linkages between the exchange rates and stock market returns for the BRICS countries (Brazil, Russia, India, China and South Africa). The univariate analysis indicates that stock returns of the BRICS countries evolve according to two different regimes: a low volatility regime and a high volatility regime. On the other hand, our evidence from Markov switching VAR models suggests that stock markets have more influence on exchange rates during both calm and turbulent periods. These empirical insights have important implications for portfolio investments and currency risk hedging.

Currency Risk Hedging: No Free Lunch

Currency Risk Hedging: No Free Lunch

Currency Risk Hedging: No Free Lunch

Currency Risk Hedging: No Free Lunch

Currency Risk Hedging With Time-Varying Correlations

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-family: Times New Roman; font-size: x-small;">This paper studies currency risk hedge when volatilities and correlations of forward currency contracts and underlying assets returns are all time-varying.<span style="mso-spacerun: yes;">  </span>A multivariate GARCH model with time-varying correlations is adopted to fit the dynamic structure of the conditional volatilities and correlations. The conditional risk-minimizing hedge strategies are estimated for an international portfolio of the US, UK and Switzerland stocks, for the period of February of 1973 to March of 2002. The empirical results show that the optimal dynamic hedging strategies can capture partially the currency fluctuations, and greatly reduce the currency risk and enhance the risk-adjusted returns of the portfolio with significant foreign currency exposures. </span></p>

Derivatives Use In The Partial Hedging Of Currency Risk: A Firm-Specific Approach To Understanding The Exchange Rate Exposure Puzzle

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="color: black; font-size: 10pt;"><span style="font-family: Times New Roman;">This study investigates whether firms with significant foreign exchange rate exposure change their future use of foreign exchange rate derivatives (FXDs). Unlike prior research, we employ firm-specific accounting data on hedging strategy and currency risk. Our results indicate that firms with high FXDs use relative to their foreign sales have significant exposure to either firm-specific bilateral exchange rates or a broad exchange rate index. Among such firms with significant foreign exchange rate exposure, we find that partial hedgers change their future use of FXDs, consistent with our expectations for firms that monitor the effectiveness of their hedging strategy. These results are timely in light of the increased scrutiny of derivatives use during the current financial crisis, and contribute to our understanding of extant research on returns-based estimates of foreign exchange rate exposure (aka, the exchange rate exposure puzzle).</span></span></p>

Cross-Border Valuation and Currency Risk Hedging

Cross-Border Valuation and Currency Risk Hedging