Currency Risk Research Articles

Analyzing the risks of an illiquid and global asset: The case of fine wine

We use a unique and very deep database to examine the performance of wine investments over the period 2003–2014. Our results reveal that the returns stemming from those investments are important but can largely be explained by their exposure to common risk factors. It appears essential to properly account for the lack of liquidity on the wine market and its exposure to global currency risk. Controlling for these wine market specificities and contradicting prior evidence, fine wines do not seem to offer abnormal returns.

The missing risk premium in exchange rates

We use a present-value model of the real exchange rate to impose structure on the currency risk premium. We allow the currency risk premium to depend on both the interest rate differential and a latent component: the missing risk premium. Consistent with the data, our present-value model implies that the real exchange rate should predict currency returns. We find that the missing risk premium, not the interest rate differential, explains most of the variation in the real exchange rate. Moreover, our model sheds light on puzzling relations between the interest rate differential, the real exchange rate, and the currency risk premium.

WAYS TO IMPROVE THE EFFICIENCY OF FOREIGN TRADE ACTIVITY OF FOREIGN MANUFACTURERS’ DISTRIBUTORS IN RUSSIA

In comparison with national manufacturers, distributors have an advantage in providing wellknown brands and might receive financial or information support by foreign manufacturers in marketing campaigns in the local market. At the same time distributors have a lack of independence in producing and pricing policies, so they are limited in the tools for reducing the costs of production and increasing the profitability of sales. Nevertheless, distributors, as well as other companies, are focused on increasing their economic efficiency. Based on the study of the activities of the company «SK Energy», the authors identified the characteristic problems associated with the implementation of foreign trade operations. Their overcoming is mainly focused on decreasing the costs associated with the transportation of goods to the territory of the Russian Federation, reducing currency risks that limit the ability of the importing company to increase competitiveness in the local market due to the price factor. The authors propose ways to solve the identified problems, confirmed by estimates of the economic efficiency of imports based on actual data on the foreign-trade transactions of «SK Energy» and calculated values, considering the possible implementation of such measures. Considering the specifics of «SK Energy» business, it is identified the possible ways to increase revenue through changes in the company's sales policy and in the conditions of cooperation between the distributor and the foreign manufacturer. The results obtained are sufficiently general and can be used in different industries by commercial organisations that are already engaged in import activities, as intermediaries between foreign producers and consumers on the national market, or only plan to develop an international direction.

Macroeconomic and institutional barriers of “normalization” of an enterprise’s financing models in Ukraine

The conditions for raising capital and the availability of capital to finance business are important for the economic development of the country. They are especially relevant for countries with low capital accumulation. The article considers how the institutional environment and macro financial imbalances affect the conditions and ways of attracting capital by business structures in Ukraine. To assess this impact, the ratio of the supply of current assets in the financial market (money supply M3) and the demand of the state for them (public debt), which during 2008-2019 decreased from 2.7 to 0.7. That is unprecedentedly low level and is the reason for the reduction of bank lending to businessses. To assess the level of depletion of the banking system, the BSER indicator (the share of bank assets that is immobilized to finance public debt) was calculated. The growth of the indicator from 5.6% in 2008 to 51.5% in 2020 indicates a progressive depletion of the banking system due to the reallocation of banks' assets to finance public debt. Analysis of the trend of fund raising by business in the stock market by placing shares showed that the number of issues and their volumes during 2015-2020 decreased significantly, and not less than 90% of the volume is carried out to recapitalize banks (including state) and state enterprises sector of the economy. The hypothesis that the identified unfavourable macro financial and institutional factors (crowding out effect, high currency risk, insecurity of property rights, raiding activity, length of court proceedings, etc.) led to the spread of non-transparent business financing practices in Ukraine and segmentation of Ukraine was confirmed. It is proved that the accumulation of a significant part of current assets in the shadow segment creates an artificial deficit of capital in the market and does not contribute to intersectoral mobility of capital, which inhibits the economic development of the country. To solve this problem, a strategy was proposed to restore the functional capacity of the country's financial system by gradually reducing the share of banking system resources invested in public debt to 10%. To deepen the analytical justification of the results obtained in further research, it is advisable to pay special attention to modelling and forecasting the impact of macro financial and institutional factors on the choice of instruments and channels of business financing.

The Peculiarities of Foreign Exchange and Insurance Markets

Foreign exchange risk is one of the most important components of the financial market. Like any other financial risk, it can be managed or avoided. Financial risk management requires the relevant knowledge and resources and only specialized financial institutions are engaged in doing so. Thee commercial banks do not accept foreign exchange risks, their assets and liabilities are denominated in the same currency. Therefore, it is recommended for households and businesses to avoid the currency risk. People's behavior is different during the sharp fluctuations of exchange rates. There is no ideal tactic for behavior. However, we would like to share some basic tips to help you reduce your expected financial risks; At the same time, the undesirable attitude characteristic of the period of strong fluctuations in the course will become clearer and more preventive. We hope that the information presented in such circumstances will help you to make the right decision. Keywords: Foreign exchange and insurance market efficiency; Exchange rate risk insurance; Involvement of financial instruments.

The Peculiarities of Foreign Exchange and Insurance Markets

Foreign exchange risk is one of the most important components of the financial market. Like any other financial risk, it can be managed or avoided. Financial risk management requires the relevant knowledge and resources and only specialized financial institutions are engaged in doing so. Thee commercial banks do not accept foreign exchange risks, their assets and liabilities are denominated in the same currency. Therefore, it is recommended for households and businesses to avoid the currency risk. People's behavior is different during the sharp fluctuations of exchange rates. There is no ideal tactic for behavior. However, we would like to share some basic tips to help you reduce your expected financial risks; At the same time, the undesirable attitude characteristic of the period of strong fluctuations in the course will become clearer and more preventive. We hope that the information presented in such circumstances will help you to make the right decision. Keywords: Foreign exchange and insurance market efficiency; Exchange rate risk insurance; Involvement of financial instruments.

The Peculiarities of Foreign Exchange and Insurance Markets

Foreign exchange risk is one of the most important components of the financial market. Like any other financial risk, it can be managed or avoided. Financial risk management requires the relevant knowledge and resources and only specialized financial institutions are engaged in doing so. Thee commercial banks do not accept foreign exchange risks, their assets and liabilities are denominated in the same currency. Therefore, it is recommended for households and businesses to avoid the currency risk. People's behavior is different during the sharp fluctuations of exchange rates. There is no ideal tactic for behavior. However, we would like to share some basic tips to help you reduce your expected financial risks; At the same time, the undesirable attitude characteristic of the period of strong fluctuations in the course will become clearer and more preventive. We hope that the information presented in such circumstances will help you to make the right decision. Keywords: Foreign exchange and insurance market efficiency; Exchange rate risk insurance; Involvement of financial instruments.

The Peculiarities of Foreign Exchange and Insurance Markets

Foreign exchange risk is one of the most important components of the financial market. Like any other financial risk, it can be managed or avoided. Financial risk management requires the relevant knowledge and resources and only specialized financial institutions are engaged in doing so. Thee commercial banks do not accept foreign exchange risks, their assets and liabilities are denominated in the same currency. Therefore, it is recommended for households and businesses to avoid the currency risk. People's behavior is different during the sharp fluctuations of exchange rates. There is no ideal tactic for behavior. However, we would like to share some basic tips to help you reduce your expected financial risks; At the same time, the undesirable attitude characteristic of the period of strong fluctuations in the course will become clearer and more preventive. We hope that the information presented in such circumstances will help you to make the right decision.

The Peculiarities of Foreign Exchange and Insurance Markets

Foreign exchange risk is one of the most important components of the financial market. Like any other financial risk, it can be managed or avoided. Financial risk management requires the relevant knowledge and resources and only specialized financial institutions are engaged in doing so. Thee commercial banks do not accept foreign exchange risks, their assets and liabilities are denominated in the same currency. Therefore, it is recommended for households and businesses to avoid the currency risk. People's behavior is different during the sharp fluctuations of exchange rates. There is no ideal tactic for behavior. However, we would like to share some basic tips to help you reduce your expected financial risks; At the same time, the undesirable attitude characteristic of the period of strong fluctuations in the course will become clearer and more preventive. We hope that the information presented in such circumstances will help you to make the right decision. Keywords: Foreign exchange and insurance market efficiency; Exchange rate risk insurance; Involvement of financial instruments.

The Peculiarities of Foreign Exchange and Insurance Markets

Foreign exchange risk is one of the most important components of the financial market. Like any other financial risk, it can be managed or avoided. Financial risk management requires the relevant knowledge and resources and only specialized financial institutions are engaged in doing so. Thee commercial banks do not accept foreign exchange risks, their assets and liabilities are denominated in the same currency. Therefore, it is recommended for households and businesses to avoid the currency risk. People's behavior is different during the sharp fluctuations of exchange rates. There is no ideal tactic for behavior. However, we would like to share some basic tips to help you reduce your expected financial risks; At the same time, the undesirable attitude characteristic of the period of strong fluctuations in the course will become clearer and more preventive. We hope that the information presented in such circumstances will help you to make the right decision. Keywords: Foreign exchange and insurance market efficiency; Exchange rate risk insurance; Involvement of financial instruments.

The Peculiarities of Foreign Exchange and Insurance Markets

Foreign exchange risk is one of the most important components of the financial market. Like any other financial risk, it can be managed or avoided. Financial risk management requires the relevant knowledge and resources and only specialized financial institutions are engaged in doing so. Thee commercial banks do not accept foreign exchange risks, their assets and liabilities are denominated in the same currency. Therefore, it is recommended for households and businesses to avoid the currency risk. People's behavior is different during the sharp fluctuations of exchange rates. There is no ideal tactic for behavior. However, we would like to share some basic tips to help you reduce your expected financial risks; At the same time, the undesirable attitude characteristic of the period of strong fluctuations in the course will become clearer and more preventive. We hope that the information presented in such circumstances will help you to make the right decision.

The Peculiarities of Foreign Exchange and Insurance Markets

Foreign exchange risk is one of the most important components of the financial market. Like any other financial risk, it can be managed or avoided. Financial risk management requires the relevant knowledge and resources and only specialized financial institutions are engaged in doing so. Thee commercial banks do not accept foreign exchange risks, their assets and liabilities are denominated in the same currency. Therefore, it is recommended for households and businesses to avoid the currency risk. People's behavior is different during the sharp fluctuations of exchange rates. There is no ideal tactic for behavior. However, we would like to share some basic tips to help you reduce your expected financial risks; At the same time, the undesirable attitude characteristic of the period of strong fluctuations in the course will become clearer and more preventive. We hope that the information presented in such circumstances will help you to make the right decision. Keywords: Foreign exchange and insurance market efficiency; Exchange rate risk insurance; Involvement of financial instruments.

The Peculiarities of Foreign Exchange and Insurance Markets

Foreign exchange risk is one of the most important components of the financial market. Like any other financial risk, it can be managed or avoided. Financial risk management requires the relevant knowledge and resources and only specialized financial institutions are engaged in doing so. Thee commercial banks do not accept foreign exchange risks, their assets and liabilities are denominated in the same currency. Therefore, it is recommended for households and businesses to avoid the currency risk. People's behavior is different during the sharp fluctuations of exchange rates. There is no ideal tactic for behavior. However, we would like to share some basic tips to help you reduce your expected financial risks; At the same time, the undesirable attitude characteristic of the period of strong fluctuations in the course will become clearer and more preventive. We hope that the information presented in such circumstances will help you to make the right decision. Keywords: Foreign exchange and insurance market efficiency; Exchange rate risk insurance; Involvement of financial instruments

Exchange Rate Exposure and Firm Dynamics

Abstract This article develops a heterogeneous firm-dynamics model to jointly study firms’ currency debt composition and investment choices. In our model, foreign currency borrowing arises from a dynamic trade-off between exposure to currency risk and growth. The model endogenously generates selection of productive firms into foreign currency borrowing. Among them, firms with high marginal product of capital use foreign loans more intensively. We assess econometrically the model’s predicted pattern of foreign currency borrowing using firm-level census data from the deregulation of these loans in Hungary, calibrate the model, and quantify the aggregate impact of this financing. Our counterfactual exercises show that understanding the characteristics of firms borrowing in foreign currency is critical to assess the aggregate consequences of this financing.

Business Analysis and Audit of Foreign Economic Activity of the Enterprise

Based on the substantiation of the necessity of changes in the management system of the enterprise in order to increase Ukraine's level in international economic ratings, a comprehensive model of the transformation of theoretical and methodological principles of accounting, analysis and audit in the management of foreign economic activity was developed. An approach to the formation of the accounting, analysis and audit principles of the enterprise's foreign economic activity, which takes into account the differentiation of decisions made in the system of management of foreign economic activity, it allows using the environment of the business entity to improve the efficiency of the implementation of foreign economic transactions. The basis of the theoretical and methodological principles of audit in the part of the suggested model of the transformation of the accounting system of transactions of foreign economic activity, which consists of tasks, elements of the method and objects of accounting, which form different processes of the types of foreign economic transactions, and provides increasing of the reliability of accounting information support, as it takes into account the influence of the internal and external environment of the enterprise. The methodical principles of the audit of export and import transactions of enterprises in the part of suggestions for improvement of documentary support, formation of the value of imported goods and reflection on the analytical accounting accounts of export-import transactions with goods, which increases the efficiency and reliability of the formation of responses to information requests of the system of management of foreign economic activity, was developed. The directions of improvement of the organizational and methodical provisions of audit for foreign economic activity of enterprises are grounded, taking into account changes in the tendencies of development of foreign economic activity at the micro and macro levels. The peculiarities of application of internal and external methods of management of currency risks in the system of enterprise accounting as an effective management tool were disclosed. It is reflected as the influence of the external environment in the accounting system and forms information support for users who make decisions on planning and development of foreign economic activity of the enterprise. The stages of obtaining foreign investments in accounting were substantiated, which promotes the modification of the methodological support of audit of foreign investments as the basis for the formation and improvement of the investment climate.

Entangled risks in incomplete FX markets

We introduce the concept of risk entanglement in a preference-free setting to jointly explain the exchange rate volatility, cyclicality, and currency risk premia in the data. Risk entanglement specifies a subset of incomplete market models, in which nondiffusive or nonlog-normal shocks to exchange rates are not fully spanned by asset returns. When risks are entangled, there exist multiple pricing-consistent exchange rates, but none of them are equal to the ratio of the stochastic discount factors (SDFs) or their projections. Decoupling the exchange rate from the SDFs allows us to address key FX market patterns that are puzzling in international finance.

Central bank tone and currency risk premia

I analyze how the tone of central bank press conferences impacts risk premia in the currency market. Tone is measured as the difference between the number of hawkish and dovish phrases mafide during a press conference, as a fraction of total phrases. A one standard deviation increase in the hawkishness of a press conference is associated with a 1.5% decline in the variance risk premium, a 4.9% decline in the subsequent variance swap return, and a 0.2% increase in option implied risk aversion. The impact of tone comes primarily from the questions & answers, or the unscripted portion of the press conference.

Currency pluralism in Asia in the Period of the Corona-Crisis

The growing interest in this topic is partly a result of the increasing attention that countries are turning to sovereign monetary systems, payment systems and e-settlements due to international sanctions towards Russia and some Asian countries as well as the necessity to overcome the negative impacts of the COVID-19 crisis. The research focuses on regional and international monetary relations and is aimed at creating hedging mechanisms of financial risks and decreasing volatility of exchange rates to stabilize both balance of trade and current-account balance. The paper investigates the approaches to diversify currency risks of the countries subject to various sanctions and accompanied by the COVID-19 crisis by means of an increasing use of national currencies in cross-border transactions within the regions. The objective of the research is to develop recommendations for Asian and Russian fiscal and monetary policy authorities and central banks in the form of analytical materials that would systemize the operations of the national currencies’ offshore markets. The practical significance of the paper is the opportunities provided by an increasing use of the leading Asian and Russian currencies to incentivize the bypass channels of incoming capital, evading international sanctions and overcoming the COVID-19 crisis. The theoretical relevance of the study is to enrich the toolkit of offshore national forwards for stabilizing exchange rate policy in the context of the COVID-19 crisis. The findings and conclusions bring new insights into the role of offshore markets which allow the sanctioned countries to solve their current problems and overcome the COVID-19 crisis based on the growing pluralism of the world monetary system.

Fiscal Cyclicality and Currency Risk Premia

Abstract I develop a model of real exchange rate determination that attributes a central role to the intertemporal government budget condition, which equates the market value of government debt to the present value of government surpluses. To enforce this equilibrium condition in the presence of nominal rigidities, the real exchange rate has to adjust in response to shocks to government surpluses. The model predicts that fiscal shocks account for real exchange rate movements, and the factor structure in fiscal shocks aligns with the factor structure in currency returns. Both predictions are confirmed in the sample of developed countries.

Equity tail risk and currency risk premiums

We find that an option-based equity tail risk factor is priced in the cross section of currency returns; more exposed currencies offer a low risk premium because they hedge against equity tail risk. A portfolio that buys currencies with high equity tail beta and shorts those with low beta extracts the global component in the tail factor. The estimated price of risk of this novel global factor is consistently negative in currency carry and momentum portfolios, and in portfolios of other asset classes, suggesting that excess returns of these strategies can be partially understood as compensations for global tail risk.