Exchange Rate Risk Research Articles

Cross-border investment and the decline of exchange rate volatility: implications for Euro area bilateral investments

Exchange rate volatility has undergone a secular decline since the collapse of the Bretton Woods system. We conjecture that this phenomenon may have led to a generalized decreased need for risk exchange hedging in financial markets. Indeed, we find that the negative association between bilateral foreign portfolio investments and the volatility of the exchange rate has markedly weakened over time. This finding, which is particularly significant for large countries and in the post-crisis period, can also help explain the decline in bilateral investments among EMU member countries. We observe, in fact, that, after 2012, the distinctive fall of Euro-area bilateral equity investments is significantly explained by the global declining effect of exchange rate volatility on financial markets. A lower exchange rate volatility, associated with the ensuing generalized reduction in the perceived exchange rate risk, may have posed a challenge to the economic relevance of the full exchange risk hedging system represented by the common currency area, and hence to the attractiveness of reciprocal investments.

Empirical Analysis of the Effects of Macroeconomic Variables on the Equity Market Risk Premium in South Africa

The relationship between the Equity Market Risk Premium (MRP) and macroeconomic variables has been a subject of extensive debate in the finance literature. The MRP is a central component of the main asset pricing models which are used to estimate the cost of equity which is mainly used in investment appraisal, performance measurement and valuation of equity assets. Prior studies have identified a number of macroeconomic variables such as inflation rate, interest rate, foreign exchange rate and political risk as the key macroeconomic variables that determine the size of the MRP. Grounded on previous literatures, the test of the impact of these macroeconomic variables on the MRP is mainly based on data obtained from the developed countries and a few emerging countries, leaving a huge knowledge gap in African based literature. This necessitated the investigation of inflation rate, interest rate, foreign exchange rate and political risk on MRP within the South African context, as these fundamental variables vary across countries. Using secondary time series data for the period 2002 to 2017, a total of 192 observations per variable was used in the study. The model used were tested for possible misspecification errors that could arise from using a secondary time series data and the regression model was fitted using the Ordinary Least Square (OLS) estimator. The results show that inflation rate, interest rate and foreign exchange rate have a negative impact on the MRP whilst political risk has a positive impact on the MRP. Furthermore, the result shows that the inflation rate is the only variable amongst other variable tested that has a significant influence on the MRP for the study period. The study recommends that inflation rate should be monitored and kept within the inflation target to increase investors’ confidence in the security market and also foster economic growth. Keywords: All Share Index, Equity Market Risk Premium, Macroeconomic Variables, Risk-Free Security, South Africa. DOI: 10.7176/RJFA/13-16-03 Publication date: August 31 st 2022

Examining the Asymmetric Effects of Third Country Exchange Rate Volatility on Trade between the US and the EU

This paper aims to examine the symmetric and asymmetric effects of third country exchange rate volatility on the trade flow between the US and EU from January 2003 through March 2021. The monthly disaggregated data of the top twelve export and import industries are the sample frame. We find that separating increased volatility from declines and introducing a nonlinear adjustment to the volatility shows a more significant outcome than symmetric analysis. Different industries carry distinctive behaviors regarding exchange rate risk, and the third country effect plays a vital role in trade. Moreover, increased CNY/USD real exchange rate volatility increases bilateral trade between the US and EU.

Yabancı Para Pozisyonunun Firma Kârlılığına Etkisi: Borsa İstanbul Örneği

With the effect of globalization, the rapprochement between countries in all areas of life has also facilitated the circulation of international capital. This convenience also enabled companies to access foreign resources. Thus, exchange rate risk and the management of this risk have become important for businesses that realize some of their financing needs in foreign currencies in open economies. In this study, which we have done based on this idea, the effect of exchange rate risk on the profitability financials of the companies through the foreign currency net positions in the company balance sheets has been examined. Firms in the BIST 100 (Borsa Istanbul 100) index were chosen as the sample of the study. The companies within the scope of the review are considered as financial, non-financial, non-exporting, exporting and all companies. The data set of 39 quarterly data for the period 2012:Q1-2021:Q3 constitutes the research. In the analyzes made, important findings were obtained between the FX net position and the firm's profitability.

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.

Information Flow Between Crude Palm Oil and Crude Oil Futures

This study finds asymmetric information flow from the crude palm oil (CPO) futures to the West Texas Intermediate (WTI) crude oil futures market despite the CPO futures market’s low liquidity and small market capitalization. Our finding is robust regardless of the 2019 Coronavirus outbreak and the asymmetric information flow becomes even unilateral considering the exchange rate risk on the Malaysian Ringgit. Finally, we explain the asymmetric information flow from the CPO futures to WTI futures market given that the impact of speculation on market efficiency crowds out that of liquidity.

Evaluation of efficiency of hedging strategies with option portfolios for buyers of the currency US dollar/Colombian peso

This paper evaluates the efficiency to mitigate the exchange rate risk of nine hedging strategies with financial options. Strategies to hedging the purchase of US dollar Colombian peso (USDCOP) by importers in Colombia were raised. In this way, the traditional strategy with call options and eight strategies with investment portfolios were evaluated. These portfolios of options for hedge are offered by financial entities in Colombia. These nine hedged scenarios were compared with the unhedged scenario that corresponds to the foreign exchange risk exposure of importers. The USDCOP currencies were modeled with a mean reversion with jumps models, option premiums were valued with the black-scholes method and the best hedging strategy was determined through a Monte Carlo simulation. According to the results obtained, the nine hedging strategies manage to mitigate risk, but the most efficient was the option portfolio called collar.

Foreign equity lookback options with guarantees

A foreign equity lookback option plays a vital role in hedging foreign exchange rate and asset price risks. Despite its importance, valuing the foreign equity lookback option is problematic because its path dependence and stochastic exchange rate complicate calculating the expected payoff. This paper delivers a unified closed-form pricing formula for the foreign equity lookback call (or put) with fixed (or floating) strike by relying on the extreme-or-nothing formulas that facilitate computing expectations. In addition, it admits valuing the options systematically with the guarantees of exchange rate and equity extremes. Numerical experiments validate the prices obtained from the analytical pricing formula.

Panda bond financing of the Belt and Road Initiative: An analysis of monetary mechanisms and financial risks

We examine the role of China Development Bank (CDB) in the Panda bond financing of the Belt & Road Initiative (BRI). We investigate the monetary mechanisms and the financial risks involved in the Panda bond financing of the BRI, especially exchange rate risks and balance of payment crisis risks. Our main findings are that the CDB may reduce its financial risks by acting as an underwriter of the Panda bonds rather than as the direct financer, but it may also have to act as a dealer of last resort. To reduce the risks of both the exchange rate and balance of payment crisis of the Panda bonds, it is important that the real investment projects are export-enhancing for host countries (generate foreign currency) and that the construction and execution of the real investment projects uses local suppliers based in host countries.

Pengaruh Inflasi Domestik dan Utang Luar Negeri terhadap Nilai Tukar Rupiah

Indonesia is a country that carries an open economy. Various internal and external factors will contribute to influencing the changes in the exchange rate at the same time. The purpose of this study is to investigate the impact of domestic inflation and external debt on the Rupiah exchange rate using secondary data from 2010.Q1 to 2021.Q1. Autoregressive Distributed Lag Analysis was used to analyze the data (ARDL). The study's findings confirmed the existence of a significant long-term relationship between the examined variables based on the analysis. It was found that both domestic inflation and external debt have a positive and significant effect on the Rupiah exchange rate over the long run, according to the long-run estimation results. Further, domestic inflation positively impacts the Rupiah exchange rate in the short-term estimation results, whereas external debt has a negative effect. Based on these findings, the government should maintain control over monetary variables such as inflation and the exchange rate through appropriate monetary policies and ensure that all external debt is prudently managed and directed toward more productive uses to mitigate exchange rate risk.

The Analysis of Global RMB Exchange Rate Forecasting and Risk Early Warning Using ARIMA and CNN Model

The purposes are to predict exchange rate fluctuations more accurately and enhance Chinese enterprises’ ability to avoid exchange rate risks. Renminbi (RMB) exchange rate fluctuation’s prediction methods are studied based on data mining technology. The Auto-Regressive Integrated Moving Average (ARIMA) model is introduced first using a modeling method that combines linear and nonlinear models. The linear prediction is obtained by the ARIMA model’s application in the RMB exchange rate’s dynamic fluctuation analysis. The nonlinear residual prediction is obtained by integrating the ARIMA model with the convolutional neural network (CNN) algorithm. The RMB exchange rate fluctuations’ influence mechanism on China’s economic growth is explored by theoretical analysis and empirical research. The US dollar’s daily central parity rate (USD) data against the RMB from September 2015 to March 2019 are selected for model verification, obtaining the exchange rate’s logarithmic return sequence (RUSD).

Global Portfolio Rebalancing and Exchange Rates

Abstract We examine international equity allocations at the fund level and show how excess foreign returns influence portfolio rebalancing, capital flows, and currencies. Our equilibrium model of incomplete foreign exchange (FX) risk trading where exchange rate risk partially segments international equity markets is consistent with the observed dynamics of equity returns, exchange rates, and fund-level capital flows. We document that rebalancing is more intense under higher FX volatility and find heterogeneous rebalancing behavior across different fund characteristics. A granular instrumental variable approach identifies a positive currency supply elasticity. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Measuring exchange rate risks during periods of uncertainty

In this paper, we empirically look at the effects of uncertainty on risk measures for exchange rates, by focusing on two recent specific periods: the Brexit and the outbreak of the Covid-19. Based on a Fama regression extended with uncertainty measures, we forecast exchange rates in the short run through a quantile regression approach. By fitting a Skewed-Student distribution to the quantile forecasts, we put forward measures of risks for appreciation and depreciation of the expected exchange rates. We point out two interesting results. First, we show that the increase in Brexit-related uncertainty is strongly associated with higher future depreciation risks of the British Pound vs. the Euro, as a mistrust towards the British economy. Second, we find that the Covid-related uncertainty is perceived as a global risk, leading to a flight-to-safety move toward the US Dollar and associated high depreciation risks for emerging currencies.

Previsión de la tendencia futura del tipo de cambio EUR/USD, mediante herramientas avanzadas de análisis técnico

Exchange rate forecasting is a major aspect of exchange rate risk hedging. The objective of this research is to propose a procedure to improve the forecasting of the future trend of the exchange rate. In order to achieve the required results, the use of a set of technical analysis tools is proposed, namely: Elliot waves, harmonic patterns and chartist analysis. The main result obtained in this research is that, by means of the proposed tools and the fractality principle, it is possible to forecast the exchange rate regardless of the time horizon to be analyzed.

Effect of operational risk on financial performance in banking industry IDX

Seeing the phenomenon of the COVID-19 pandemic, it has resulted in changes in the work patterns of many banks in Indonesia. The presence of COVID 19 is able to change the current pattern of bank operations in Indonesia. The financial performance of a company is a measure of the company's profits or losses in a certain period of time. Which could be issues related to banking risk management such as exchange rate risk, operational risk and interest rate risk. To raise arguments about how risk affects financial performance can reduce the probability of bankruptcy and provide greater stability of banking. This study aims to determine the effect of the dependent variable on financial performance as measured by return on assets and return on equity and the independent variable net interest income, average asset turnover, total operating expense, interest over years, exchange rate. The purpose of this study is to examine the effect of operational risk on financial performance in the banking industry listed on the IDX.

WHAT CHANGED IN THE PROBLEMS AND SOLUTIONS OF ENTERPRISES IN THE PRE-COVID-19 / COVID-19 PERIOD EVALUATION OF THE SURVEY RESULTS OF SWORN-IN CERTIFIED PUBLIC ACCOUNTANTS OF ISTANBUL

Purpose- The purpose of this study is to identify what has changed on the enterprises’ problems and solution proposals pre and during the COVID-19 period. In this context, the problem and solution proposals obtained from the "Chamber of Sworn-In Certified Public Accountant of Istanbul Economy Expectation Index and Encountered Problems and Solution" survey were evaluated on basis of sectors. Methodology- The survey used in the study has been applied quarterly since 2017 to 13 different sectors and more than 300 enterprises. In April 2020, the survey was applied as a COVID-19 thematic survey. In this study, the results of the pandemic thematic survey and the results applied in the 2019-2021 periods were compared using frequency breakdowns for 8 sectors. Findings- According to the findings, it was stated that serious losses occurred due to the exchange rate risks due to the problems experienced with the fluctuation of the exchange rate. In addition, the global economic recession has become one of the important problems of enterprises that have problems in terms of equity capital. While the profitability ratios decreased due to the contraction in demand and increase in costs, it was observed that enterprises with increasing credit costs had difficulties in accessing appropriate financing. Conclusion- According to the study, it has been demonstrated that sectors appear new problems in the pandemic. Hence, sectors' problems should be considered on a preferential basis by public authorities. It has been considered incentive that is applied by the public authority will have a great influence on enterprises. Keywords: Covid-19, sectoral problems, encountered problems and solution proposals. JEL Codes: P00, M21, M29

Attention to the Tail(s): Global Financial Conditions and Exchange Rate Risks

We document how the entire distribution of exchange rate returns responds to changes in global financial conditions. We measure global financial conditions as the common component of country-specific financial condition indices, computed consistently across a large panel of developed and emerging economies. Using quantile regression, we provide a characterisation and ranking of the tail behaviour of a large sample of currencies in response to a tightening of global financial conditions, corroborating (and quantifying) some of the prevailing narratives about safe haven and risky currencies. Compared to most standard approaches, our methodology delivers a more nuanced picture of exchange rate behaviour, allowing for example to make probabilistic statements about the likelihood of observing large swings in returns given the prevailing global financial environment. We also identify macroeconomic fundamentals associated with different tail dynamics: currencies of countries with higher interest rates, low levels of international reserves and large fiscal deficits display more marked increases in the likelihood of large losses in response to a tightening of global financial conditions.Supplementary InformationThe online version contains supplementary material available at 10.1057/s41308-022-00160-0.

Macroeconomic News and Risk Exposure to Foreign Exchange Rate Evidence from Chinese Listed Firms

ABSTRACT This paper estimates the exchange rate exposure of Chinese listed firms across industries and tests whether their risk exposure to foreign exchange rates is shaped by macroeconomic news. Using a sample of 2321 Chinese listed firms from 2007 to 2020, we use six alternative models to estimate firms’ exposure to foreign exchange risk and their variations following macroeconomic news. We find that the risk exposure to foreign exchange rates significantly responds to macroeconomic news. The response is larger to news about GDP and international trade, and the response is particularly strong during the times of the Global Financial Crisis, the US-China trade war and the outbreak of COVID-19. Across different currencies, firms are more sensitive to the US dollar exchange rate risk. Across different industries, firms in technology-intensive industries are more sensitive to foreign exchange risk. Overall, the findings in this paper shed light upon the risk management of multinational firms in emerging markets.

Dependence Structures between Sovereign Credit Default Swaps and Global Risk Factors in BRICS Countries

This study investigates the tail dependence structures of sovereign credit default swaps (CDSs) and three global risk factors in BRICS countries using a copula approach, which is popular for capturing the “true” tail dependence based on the “distribution-adjusted” joint marginals. The empirical results show that global market risk sentiment comoves with sovereign CDS spreads across BRICS countries under extreme market events such as the pandemic-induced crash of 2020, with Brazil reporting the highest bilateral convergence followed by China, Russia, and South Africa. Furthermore, oil price volatility is the second biggest risk factor correlated with CDS spreads for Brazil and South Africa, while exchange rate risk exhibits very low co-dependence with CDS spreads during extreme market downturns. On the contrary, exchange rate risk is the second largest risk factor co-moving with China and Russia’s CDS spreads, while oil price volatility exhibits the lowest co-dependence with CDS in these countries. Between oil price and currency risk, evidence of single risk factor dominance is found for Russia, where exchange rate risk is largely dominant, and policymakers could promulgate financial sector regulations that mitigate spill-over risks such as targeted capital controls when markets are distressed.

Board attributes, hedging activities and exchange rate risk: Multi-country firm-level evidence

This study examines whether board attributes determine firms' exchange rate risk by influencing their hedging activities. Prior literature demonstrates that strong corporate governance encourages value-enhancing hedging, but the effects of firm-level governance such as board structure on the level of firms' risk exposure have rarely been investigated. By analyzing a sample of firms in 10 emerging markets during 2011–2019, I investigate the effects of board attributes—such as size, leadership, independence, and gender diversity—on firms’ exchange rate risk. This study provides the first evidence that firms with larger boards and higher board independence face lower exchange rate risk due to more efficient hedging. Moreover, firms with gender-diverse boards become more effective in hedging and face lower exposure when board independence is higher. The findings signify that better monitoring by the board of directors over managers makes hedging more effective, resulting in lower exchange rate risk.