Exchange Rate Management Research Articles

FOREIGN EXCHANGE RATE RISK AND HEDGING INSTRUMENTS IN INTERNATIONAL TRADE

Aim: The aim of this article is to examine the exchange rate risk in international trade and the methods of hedging this risk in detail. Currency risk is when companies are faced with uncertainties arising from fluctuations in exchange rates, which can severely affect companies' operations, profitability and cash flow. The article aims to contribute to the development of effective strategies for companies against exchange rate risk. Method: This article is based on a basic and applied literature review on exchange rate risk and hedging instruments. Academic resources, research articles, and current financial literature have been used to compile information and data on exchange rate risk management. The advantages and disadvantages of prevention tools are discussed based on the analysis of the studies in the literature. Results: The results presented in the article confirm that exchange rate risk is an important risk factor for companies doing business in international trade. Currency fluctuations can affect the profitability of companies, adversely affect their cash flows and threaten their financial stability. However, when correct and effective hedging strategies are used, companies can manage this risk and minimize its negative effects and become more financially secure. Conclusion: The article highlights the importance for companies of managing exchange rate risk in international trade. Derivative products, which are hedging instruments that companies can use against exchange rate risk, have an important role in risk management. By properly assessing exchange rate risk and implementing appropriate hedging strategies, companies can create a more stable international trading environment and achieve long-term success.

The Importance of Corporate Foreign Debt in Managing Exchange Rate Exposure in Non-Financial Companies

The Importance of Corporate Foreign Debt in Managing Exchange Rate Exposure in Non-Financial Companies

The Euro exchange rate's resistance to the exogenous shock caused by COVID-19

Background: The COVID-19 pandemic represents the greatest exogenous global shock in the last few decades, which has deeply affected the macroeconomic aggregates around the world. Bearing in mind that COVID-19 pandemic is an exogenous shock; its effect on the macroeconomic aggregates will take time to be analysed, while it has a persistent impact on the financial markets. Purpose: One-third of the transactions worldwide includes the Euro. Hence, the main objective of this study is to estimate the Euro exchange rate's resistance to the exogenous shock caused by the COVID-19 pandemic. Study design/methodology/approach: This paper employs the General AutoRegressive Conditional Heteroskedasticity (GARCH) model to examine the EUR/USD exchange rate's resistance to the global exogenous shock caused by the COVID-19. In other words, the authors try to find an answer to question whether the COVID-19 pandemic affects the EUR/USD exchange rate volatility. Finding/conclusions: The results show that the COVID-19 pandemic has no effect on the EUR/USD exchange rate volatility in the long run. These results may confirm our assumption of the resistance of the financial market to the exogenous shock and are useful for anyone needing forecasts of the exchange rate futures movements. The obtained results produce pragmatic expertise in order to manage exchange rate risk and should support policymakers to advance exchange rate policy. Limitations/future research: As a limitation of this study, the authors state the estimation of the Euro exchangeratès resistance to only one exogenous shock, caused by COVID-19. Bearing in mind that in the considered period was also the world economic crises which might have caused a higher volatility then COVID-19, for further research the authors propose an examination of the detailed estimation of the Euro exchangeratès resistance to different exogenous shocks.

Liquidity Regulation and the Transmission of Lending Shocks Across Borders

We investigate how liquidity regulation affects the transmission of negative wholesale funding shocks from the largest OECD global banks to the lending of their foreign subsidiaries across 98 countries. Controlling for adverse solvency shocks, which we argue is very important for identification, we find that, surprisingly, liquidity regulation exacerbates the transmission of adverse wholesale shocks. These findings suggest that liquidity regulation has a destabilizing effect for the host market. The effect is driven primarily by countries with floating exchange rate regimes and less so by countries with currency boards and other exchange rate management arrangements, such as dollarization. The results from our global study provide important lessons for Bulgaria in its transition from a currency board to a euro area membership.

Effectiveness of the Exchange Rate Channel in Monetary Policy Transmission in Pakistan


 
 
 
 
 The exchange rate is one of the most important channels of monetary policy transmission to the real economy. However, the effectiveness of this channel depends on the extent of exchange rate flexibility, degree of international capital mobility, and inflation expectations. Like other emerging economies, Pakistan is typically characterised by weak fiscal and monetary institutions, currency substitution, liability dollarisation, and vulnerability to sudden stops of capital flows. These features compel emerging economies to follow managed exchange rate regimes by restricting the mobility of capital flow. All these factors weaken the effectiveness of the exchange rate channel of monetary policy transmission. This study estimates the effectiveness of the exchange rate channel in monetary policy transmission in Pakistan and explores the impact of exchange rate regimes on the channel’s strength. The study benefitted from the widely used structural VARs methodology and found that the exchange rate channel is less effective in transmitting monetary policy shocks to the real economy. In recent years, however, greater flexibility in the exchange rate has improved the effectiveness of this channel.
 
 
 
 

Exchange Rate Pass-through to Consumer Prices in Pakistan: Does Misalignment Matter?

This study investigates the impact of exchange rate changes on consumer prices (commonly known as exchange rate pass-through (ERPT)) in Pakistan for the period 1995M1 to 2009M3. The study estimates short-run and long-run ERPT in Pakistan while taking into account the existing real exchange rate misalignment (RERM). The results suggest that the ERPT to consumer price inflation in Pakistan is very low (close to zero). The impact of the previous periods’ misalignment on inflation is found significant in managed exchange rate regime. However, the overall sample misalignment does not affect inflation. The impact of foreign inflation on domestic inflation is positive and statistically significant. JEL classification: F31, F41, E31 Keywords: Pass-through, Misalignment, Inflation

Money, exchange rate and export quality

This paper theoretically examines the effect of an expansionary monetary policy on export quality and its ramifications on the aggregate employment of the unskilled workers in a competitive general equilibrium framework of a small open economy. Monetary policies are often pursued by the central bank of an economy to manage exchange rate fluctuations under a managed float regime, which may have adverse consequences for export-quality choices and thereby for export growth given the growing preference of buyers in richer nations for higher qualities of imports. Under optimal allocation of wealth over a portfolio of cash, domestic assets and foreign assets, we show that an increase in the domestic money supply affects the choice of export-quality through larger investment, capital formation and consequent endowment effect and through changes in the nominal exchange rate. Under less price-elastic demand for a non-traded good, export quality is upgraded when quality upgrading is relatively capital (than skill) intensive. The expansionary monetary policy may raise aggregate employment of unskilled workers due to larger investment and capital formation, but may lower it through changes in the quality of the export good. The overall effect is thus ambiguous. A larger initial size of bequests has a similar effect.

An Assessment of The Effectiveness of Sterilization of Central Bank Interventions: Empirical Evidence from India

The active participation of the central bank in exchange rate management has accelerated the growth of foreign exchange reserve in India. The massive reserve stockpiling has substantially contributed to apprehensions about excess liquidity in the domestic economy. The extent to which these concerns are justified depends on the degree to which the central bank is able to mitigate its effects on monetary aggregates. This study is an attempt to assess the magnitude of the sterilization coefficient by using quarterly data from 1996 to 2019. In order to estimate sterilization and offset coefficients, the study employed the two-stage least squares (2SLS) method under the theoretical framework of simultaneous equation modelling. The findings show that the reserve accumulation through central bank interventions puts pressure on money supply. However, the RBI sterilization policy was effective as the central bank was able to sterilize 93 percent of its interventions, while the offset coefficient was 72 percent during the period of study. The low value of the offset coefficient compared to the sterilization coefficient indicates a high degree of monetary policy independence in neutralizing the central bank's purchase interventions. Based on the findings, it can be recommended that policymakers should consider the sustainability of interventions and sterilization operations as the dual policy objectives of independent exchange rate management and monetary policy cannot be achieved in the presence of a high interest rate in an inflation-targeting regime.

Efficacy of central bank intervention in the foreign exchange market of the BRICS countries

Central bank intervention plays a major role in managing exchange rate volatility. In comparison to advanced economies, emerging market economies are generally active in the forex market as excessive volatility of the local currency persists. The BRICS countries (Brazil, Russia, India, China and South Africa) are the major emerging economies influencing the international financial system. The paper empirically investigates the efficacy of central bank intervention in the case of the BRICS countries. It has been observed that intervention generally did not impact the exchange rate level; however, it reduced the volatility of the exchange rate. Furthermore, interventions in spot and derivatives markets are equally effective in containing exchange rate volatility, except in South Africa. It has been identified that sovereign yield spread impacts the exchange rate returns in China and South Africa and impacts the volatility in the returns in Brazil and Russia.

Which inflation targeters respond to exchange rate movements? Evidence from emerging market economies

ABSTRACT There is a significant difference between de facto and de jure regimes in terms of exchange rates, especially in emerging market economies. A simple open economy model is used to test the empirical plausibility of a managed exchange rate system in which the monetary authority responds to exchange rate movements with foreign exchange intervention as an additional goal of monetary policy. This study demonstrates that this system fits the data better than a float-system specification. In addition, it is found that the authorities in Asian countries are more likely to intervene in the foreign exchange market with a higher degree of concern regarding exchange rate movements. The study empirically confirms that all emerging market inflation targeters have employed a de facto managed exchange rate system while adopting a de jure float system.

Assessment of interest rate channel Effectiveness in the transmission of Monetary Policy in Nigeria

This study attempted to investigate the effectiveness of the interest rate channel in the transmission of monetary policy by employing a structural vector autoregressive (SVAR) model using sign restriction. It used a set of policy and non-policy macroeconomic variables based on monthly data spanning the period 2007 and 2020. The structural impulse response functions provided evidence to support the use of the MPR as a signaling rate for domestic interest rates but was, however, found to be ineffective in stabilizing prices or increasing output. Furthermore, results from the variance decomposition of the non-policy variables found the effect of exchange rate innovations to be more significant in explaining variations in the price level. The study, therefore, concludes that the effectiveness of the policy rate in stabilizing prices is dampened by shocks prevalent from the external sector. Given the importance of international trade, the study recommends aggressive exchange rate management including policies that encourage import-substitution to build reserves and strengthen the value of the domestic currency.

Modeling the Impact of Pandemic-Induced Shocks and Support Measures with an Emerging Market Economy

Purpose: This paper analyzes the impacts of COVID-19 shocks on an emerging market economy using a Graphical User Interface (GUI) model. Methods: Event study analysis has been adopted using secondary data for measuring the impacts and impulse responses of different shocks. Results: The paper shows how the shocks affect the economy using graphical presentations of impulse responses of major macroeconomic indicators. The shapes and movements of the impulse response curves indicate how the effects pass through from one sector to another; how long the effects may persist in the economy, and how much time will be required for recovery. All these simulations suggest that immediate supportive measures from both fiscal and monetary sides help recover the economy, although marginally due to the required higher costs stemming mainly from the higher exchange rate volatility. Implications: Several policy implications such as sector-specific support measures, prioritization of sectors, rationing of credit facilities, efficient exchange rate management, etc., can be followed by the countries regarding fiscal and monetary policy measures towards reducing COVID-19-induced similar shocks.

Exchange Rate Regimes, Import Prices and Foreign Reserve Holdings in Africa

In this study, we examined dynamic interaction between exchange rate regimes, import prices and foreign reserve holdings in developing countries. Monthly data for the study were obtained on five African countries from 1980M1 to 2020M12. Recognizing that our sample of nations may not be homogenous due to unobserved characteristics of the individual countries such as, economic size, or differences in financial strength, we modelled reserve holding following P-ARDL specifications of Pesaran, Shin & Smith (1995) which recognizes the MG and PMG modeling in error correction configurations. The Hausman test reveals that MG was more efficient compared to PMG. To check robustness of our MG estimates, we had an alternative GMM specification. The GMM estimation was also necessitated to overcome simultaneity biases and endogeneity problems that characterized OLS estimation of our P-ARDL model. Findings showed that exchange rate regime is a significant positive contributor to the volume of reserve holdings while import prices negatively influences reserve holdings. Relatively, study reveals negative contributions of cost of holding reserves, and inflation towards declining reserve holding in selected countries of Africa is highly significant in both SR and LR. Nevertheless, significant heterogeneity exists amongst countries as regards speed of adjustment following disturbances in SR reserve holding to LR convergence. Nigeria had the fastest speed of 61% compared to Angola, Kenya, South Africa, and Egypt with 49%, 20%, 50%, and 19% respectively. Differences in economic strength, economic size (GDP), government factor, political size, financial depth, etc. of countries could have accounted for the difference in adjustment speed. Our MG estimates were found robust to a GMM specification. The study concludes that there is a dynamics interaction between exchange rate regime, import prices and foreign exchange reserves holding. We so recommended that African countries should strategically implement policies to reduce their inflation rates, dependence on import, effectively manage exchange rate regime so that they can achieve higher volume of external reserve holdings that will lead to a reduction in their import prices.

Global Economic Uncertainties and Exchange Rate Management in Africa: A Panel Study

Abstract This study investigates the effects of global economic uncertainties on exchange rate management in Africa from 1990 to 2021. Employing the quantile regression technique, findings show that both global and domestic economic uncertainties have significant influence on exchange rate management in Africa. The intensity of global economic uncertainty rises during the bearish and transitional markets, but dependence declines during the bullish markets. Moreover, the relationship between domestic uncertainty and African exchange rate management shows that the structure of dependence improves around the upper tails but declines around the lower tails. African countries should pay attention to global economy in order to combat any impending negative effects of global economic uncertainties. Also, attention should be paid to other uncertainties such as political, social, or other factors that may aggravate domestic economic uncertainties.

Inflation targeting in Singapore. Lessons for Ukraine

Russian aggression in Ukraine posed a difficult task for Ukrainian monetary authorities. In order to keep stability of national currency exchange rate the National Bank of Ukraine (NBU) fixed the U.S. dollar exchange rate immediately after the start of the conflict. However, NBU acknowledged that it considers fixed exchange rate as an impediment to inflation targeting, which NBU has chosen as its policy for money and credit since 2014. The main aim of this article is to show that inflation targeting is possible under fixed exchange rate regime. Thus, the problem of policy choice for NBU is not so dramatic. Price stability is compatible with management of exchange rate in both practical and theoretical perspectives. In order to prove this thesis, we will look into Singapore’s experience of targeting inflation with fixed exchange rate.
 Singaporean experience of managing its exchange rate proves that greater flexibility is possible in the context of monetary policy choice. Depending on a situation Singaporean central bank is able to “lean against the wind” and shift swiftly between the corners of “Impossible Trinity” allowing greater control over exchange rate and interest rate in a short-term time horizon. Furthermore, management of exchange rate is compatible with inflation targeting paradigm which is strongly advised for a small-open economy by international financial organizations such as IMF. Singaporean experience also proves that the reaction function of MAS is compatible with the Taylor rule. Eventually, Singaporean economy maintains price stability without committing its monetary policy to interest rate targeting exclusively.

Analysis and Prediction of Corporate Finance and Exchange Rate Correlation Based on Machine Learning Algorithms.

Based on the risk management of exposure to foreign exchange assets and liabilities and the application of financial derivatives, this paper provides an in-depth analysis of the financial and exchange rate risks of foreign-funded enterprises. Therefore, a method of evaluating the financial performance of listed financial enterprises based on principal component analysis and neural network model is proposed. First, principal components of alternative financial performance input-output indicators are extracted using principal component analysis. Subsequently, these principal components are used as input-output data for the DEA model to derive the relative validity evaluation results of the financial performance of individual financial enterprises and to provide a reference for decision making to improve the financial performance level of financial enterprises. Combined with the economic business data of the enterprises, an empirical test on exchange rate risk management is conducted and relevant suggestions are made on how foreign enterprises can reduce exchange rate risk losses. It has important theoretical value and practical significance for enterprise finance and exchange rate management.

Exploring the Role of Exchange Rate in Driving Market Capitalization in Nigeria

The centrality of exchange rate in stock market performance cannot be over-emphasized. Thus, this study examined the dynamic effects of exchange rate on market capitalization in Nigeria. The specific objectives are to examine the effects of nominal exchange rate, real effective exchange rate, real interest rate and inflation rate on market capitalization using time series data which were obtained from the WDI and World Federation Exchanges Database between 1993 and 2020. Unit root test, cointegration test, ARDL estimation method, Granger causality tests were applied to analyze the data. The unit root test results showed that only market capitalization is stationary at levels whereas the other variables become stationary at first difference. The bounds cointegration test result revealed that market capitalization has long run relationship with the explanatory variables. The results revealed that real effective exchange rate impacted positively on the market capitalization. This implies that increase in real exchange rate (depreciation of the naira) creates opportunity for increase in the capital market size. The results further revealed that nominal exchange rate has an insignificant positive effect on market capitalization in the short run and long run. This could be linked to the inconsistency that characterizes the official exchange rate policy in Nigeria. It was also found that real interest rate has significant negative effect on market capitalization in the long run. At the same time, inflation rate negatively affected market capitalization. The Granger causality test results showed that a unidirectional causality runs from real interest rate and market capitalization. Given the findings, this study recommends that policymakers should ensure that the exchange rate management prioritizes a realistic and stable exchange rate to boost global competitiveness and improve market capitalization.

External Sector Macroeconomic Indices and Real Economy of Nigeria: An Empirical Analysis (1981 – 2020)

In recent times, the external sector of Nigeria’s economy has been characterized by instability, while the performance of her Real Economic Growth (RGDP) has remained below average. This study, therefore, investigated the relationship between her (RGDP), and some external sector macroeconomic indices, namely: Foreign Exchange Rate (FXR), Total Export (EXP). Trade Openness (TOR), Total Import (IMP), External Debt (EXTD), External Debt Service Charges, (EXDINT) and Foreign Direct Investment (FDIR), CBN is the source of the study data, spanning for a period of 1981 to 2020. The study applied Co-integration technique, Error Correction Model (ECM) and Granger Causality tests for the econometric analysis. Evidence from empirical results confirmed that, in the long run, only FDIR contributed positively to (RGDP), while the rest, had significant adverse effect on RGDP. The Granger Causality test established that only FDIR had bilateral relationship with RGDP while RGDP preceded EXP, TOR and FXR, implying that RGDP determines those variables without a feedback. EXTD, EXDINT and IMP maintained independent causal relationship. The ECM coeficient (-1.14), is significant and correctly signed (negative). It measures the speed of the adjustment, at which equilibrium is restored to RGDP, after the short-run disequilibrium in the selected indices. The implication is that RGDP growth process in Nigeria, in the long run, adjusts slowly to the changes in the selected indices, indicating a Policy lag effect. Consequently, Monetary authority should maintain efficient debt monitoring and management; effective and sustainable exchange rate management; infrastructural and technological development to beep up exportation. They should lay emphasis on stable political environment and sustainable economic policies to encourage more FDI. The Policy makers should make policies that would match the magnitude of the expected changes.

Managing Exchange Rate Volatility during Political Crises

The goal of this paper is to show how the exchange rate volatility could be managed during political crises, using as a case study the fragile
 the political relationship between USA and Turkey between 2014-2019. The Turkish Lira has dramatically dropped against the US dollar to a record low level in August 2018. The Turkish president accused the American president of economic war, insisting that his country would survive an economic assault, but neglecting to comfort financial markets (worried about the breakdown of the national currency of a crucial emerging economy). Meanwhile, investors feared that a financial crisis could spread throughout Europe. Fears of contagion remained high, although the central bank of Turkey pledged to provide liquidity for Turkish banks. In this background, this paper tries to find if different specifications of univariate GARCH models can anticipate volatility in the foreign exchange market. Our study uses estimates from a symmetric GARCH model, namely GARCH (1,1) for the TRY/USD exchange rate. The data set was obtained from “Investing.com” and covers
 the period January 2014 – to October 2019. This study shows that GARCH (1, 1) can be successfully applied in modeling and forecasting the volatility trend of the currencies and so in exchange rate administration.

Monetary policy rule, exchange rate regime, and fiscal policy cyclicality in a developing oil economy

According to Frankel and Catao (2011), a commodity-exporting developing economy is advised to target the product price rather than consumer price, as the former monetary policy is automatically countercyclical against the volatile terms of trade shock. This paper constructs a dynamic stochastic general equilibrium model of joint monetary and fiscal policies for a developing oil economy, to find an appropriate monetary rule combined with a pro/counter/acyclical fiscal stance based on a loss measure. The foreign exchange interventions distinguish between a managed and flexible exchange rate regime, while fiscal policy cyclicality depends on the oil output response of public consumption and public investment. The study reveals that the best policy combination is a countercyclical fiscal stance and consumer price monetary targeting under a managed exchange rate regime to stabilize the domestic price inflation, aggregate output, and real exchange rate in a small open economy.