Foreign Exchange Risk Research Articles

Is Currency Futures Market at NSE India Informationally Efficient?

In a perfectly efficient and frictionless market, futures price should move concurrently with the underlying spot price without any lead or lag in price movements across markets. Futures price should be an unbiased estimator of the future spot price at the expiration date. Traders, exporters, importers and MNCs are exposed to foreign exchange risk to hedge their foreign currency exposures. They enter in to currency future contract. The hedging effectiveness depends on the efficiency of currency future market. In this paper, we analyse the efficiency of currency future market at National Stock Exchange (NSE) of India for sample period. The various parametric and non-parametric tests have been applied to test the efficiency of US $ currency futures market at NSE in India. Johansen’s Cointegration reports that US dollar futures and spot series are cointegrated and possess long run equilibrium with each other. From Granger Causality results, we find that there is one-way causality from US dollar futures to spot market. Therefore, we conclude that currency future market at NSE India is informationally efficient. Hence, US dollar futures can be used to hedge against US dollar denominated foreign exchange exposure.

Capital Control and Monetary Policy in Asian Emerging Market Economies

This paper explores two policy options in emerging market economies (EMEs) to cope with volatile capital flows due to external monetary policy shocks; capital control policy and choice of exchange rate regime. Both tools reinforce each other when a foreign exchange risk premium shock hits the economy. A contractionary U.S. monetary policy shock has significant real effects in EMEs. Conventional wisdom tells us that a free floating exchange rate with inflation targeting is better when a country faces foreign shocks. However, we show that a flexible exchange rate with less capital controls is not the best option in EMEs based on vector autoregression analysis. Moreover, we set up a small open economy new Keynesian model with real wage and price rigidities. It shows that the small economy with labor market frictions is more vulnerable to exogenous shocks such as a foreign exchange rate shock under a fixed exchange rate regime than under a flexible exchange regime. We show that maintaining price stability is not desirable when there are substantial frictions in the labor market and the intratemporal elasticity of substitution is high. Finally, the model shows that the welfare cost difference between a policy of maintaining purchasing power and a policy aimed at price stability reverses as the intratemporal elasticity of substitution between home and foreign goods increases.

Unconventional Monetary Policy and International Risk Premia

AbstractWe assess the relationship between monetary policy, foreign exchange risk premia, and term premia including the period at the zero lower bound (ZLB). We estimate a structural vector autoregression including U.S. and foreign interest rates and exchange rates and identify monetary policy shocks through a method that uses high‐frequency monetary policy surprises as the external instrument that achieves identification without using implausible restrictions. We split out effects of different types of monetary policy surprises that apply at the ZLB, including forward guidance and asset purchases. This allows us to measure the effects of policy shocks on expectations, and hence risk premia.

La administración del riesgo cambiario en ambientes de contingencia de las empresas importadoras y exportadoras de Oaxaca y Ciudad de México

Las empresas importadoras y exportadoras, en comparación con las que no comercializan al exterior, tienen un riesgo adicional caracterizado por la volatilidad cambiaria. En esta investigación, se analizan las características que distinguen a la administración de las empresas con operaciones internacionales de la ciudad de México y Oaxaca, con altos rendimientos ante el riesgo cambiario 2014-2016 en ambientes contingentes, versus las empresas con bajos rendimientos, donde según la teoría de la contingencia las empresas usan diferentes mecanismos para adaptarse a los cambios del medio ambiente. Se usó una regresión logística (RL) para clasificar a las empresas con rendimientos superiores al 20 %, en función a sus características en la administración. Para caracterizar la administración se utilizaron 23 variables explicativas que abarcaron aspectos del administrador y los esquemas de cobertura empleados. Los resultados obtenidos encontraron que solo cuatro de las 23 variables fueron estadísticamente significativas para que las compañías lograran altos márgenes de rentabilidad, sobresaliendo la utilización de instrumentos financieros derivados como un factor determinante.

Credit Risk Management of Kumari Bank Ltd. Nepal

Banks are always faced with different types of risks that may have a potentially negative effect on their business. Risk-taking is an inherent element of banking and, indeed, profits are in part the reward for successful risk taking in business. On the other hand, excessive and poorly managed risk can lead to losses and thus endanger the safety of a bank's depositors. Risks are considered warranted when they are understandable, measurable, controllable and within a bank’s capacity to readily withstand adverse results. Sound risk management systems enable managers of banks to take risks knowingly, reduce risks where appropriate and strive to prepare for a future, which by its nature cannot be predicted.Financial institutions are subject to a number of risks such as Credit risk, Market risk management, Foreign exchange risk, Operational risk, and Liquidity risk. Although credit risk has always been of primary concern to these institutions, its importance became paramount during the recent financial crisis. The crisis exposed the shortcomings of existing risk management systems, and several firms saw significant losses resulting from failure of their counterparties to deliver on contracts. Firms may also be worried about a second recession, which makes credit risk a top priority.

Economic Policy Uncertainty in the US: Does It Matter for Korea?

Using the indicators of economic policy uncertainty developed by Baker et al. (2016), this paper investigates the effects of the US economic policy uncertainty on the Korea economic uncertainty as well as Korea-US foreign exchange risk. The key findings are that: (i) the degree of spillovers of policy uncertainty from the US to Korea is considerable but not comparatively high; (ii) the US policy uncertainty plays a stronger and more consistent role in Korean currency risk than Korea policy uncertainty and other macro variables. It implies that the economic policy uncertainty in the US is an important contributor to Korea-US exchange rates.

국제계약 환위험 관리 제도 발전방안에 관한 연구

국제계약 환위험 관리 제도 발전방안에 관한 연구

Financial Performance in Thai Food Industry

This paper aims to rank priority on companies’ performance improvement for Thai medium- and large-sized food industry: cost-efficiency seeking and value-added creation. Listed (large-sized) companies of Thai food industry show better performance than non-listed (medium-sized) companies in every measurement dimension, for examples, larger company sizes, higher profitability and lower costs of capitals. In short run, Thai non-listed food companies should aim for seeking cost-efficiency from production and financial cost reduction including foreign exchange risk due to their main sales volumes relying on export market. To enhance companies’ value for Thai listed food companies, companies’ economic value-added increases by fixed asset turnover, profit margin, sales growth, and time interest earned. On the other hand, Average costs of capitals (WACC) are negatively related to economic value-added. The food companies with high EVA will have lower costs of capitals. The listed companies achieve their value enhancing target quite satisfied, while non-listed companies should set this value-enhancing target for their long-run goal Keywords: Economic Value-Added; Cost Efficiency; Thai Food Industry

Uluslararası Muhasebe Standartları Kapsamında Kur Riski Yönetim Faaliyetlerinin Muhasebeleştirilmesi

Today, companies operating in the country's economies, which have become the only market, especially with the influence of globalization, face serious exchange rate risk. This risk can has negative effects on the results of operations of the enterprises. Many different day-to-day exchange rate risk management techniques are emerging in order to reduce or minimize these effects. However, the implementation of these methods brings with it a number of difficulties. Within the scope of International Accounting and Financial Reporting Standards (IAS / IFRS), which is mandatory for many companies as of 2005, it is aimed to give theoretical information about the forward contracts used in the foreign exchange risk management activities and the accounting process and to examine the implementation period. In this context, the theoretical information about the emergence, management and management instruments of the foreign exchange risk was given as the priority and the different alternatives of the risk management activities in the scope of IAS / IFRS have been presented afterwards. Finally, the risk management process belonging to a company operating in Turkey and the applications of the financial transactions included in this process within the scope of financial risk protection accounting.

The Impact of Mandatory Governance Changes on Financial Risk Management

Using the Sarbanes-Oxley Act of 2002 as a quasi-natural experiment to identify the impact of corporate governance reform on foreign exchange risk hedging, we find that the substantial improvements in governance standards increased derivatives hedging and reduced foreign exchange exposure. The results are robust whether we consider initial reform gap or actual implementation, focus on legally required governance measures or include voluntary concomitant reforms. The economic magnitude of the effect is large. Our findings are corroborated by cross-sectional evidence, showing that firms with larger foreign markets exposure and a larger distortion in CEO incentives react more strongly to the reform. Financial hedges are implemented rapidly whereas exposure measures that encompass operational hedges take more time to adjust.

Optimal Foreign Exchange Risk Hedging: Closed Form Solutions Maximizing Leontief Utility Function

In this paper, we extend Kim (2013) for the optimal foreign exchange (FX) risk hedging solution to the multiple FX rates and suggest its application method. First, the generalized optimal hedging method of selling/buying of multiple foreign currencies is introduced. Second, the cost of handling forward contracts is included. Third, as a criterion of hedging performance evaluation, there is consideration of the Leontief utility function, which represents the risk averseness of a hedger. Fourth, specific steps are introduced about what is needed to proceed with hedging. There is a computation of the weighting ratios of the optimal combinations of three conventional hedging vehicles, i.e., call/put currency options, forward contracts, and leaving the position open. The closed form solution of mathematical optimization may achieve a lower level of foreign exchange risk for a specified level of expected return. Furthermore, there is also a suggestion provided about a procedure that may be conducted in the business fields by means of Excel.

Upravljanje kreditnim rizikom u bankarskom sistemu Republike Srpske u kriznom periodu

Considering the character, development and the current economic conditions of business operations in Republika Srpska (undeveloped capital market, inadequate legal regulations for the realization and collection of collaterals, the dominant participation of loan business operations in the overall banking), the greatest attention in controlling the banking sector is paid to the control of loan, liquidity and foreign exchange risks. This sector has recently recorded a decline in non-performing loans and a slight growth in profitability, as shown by negative correlation coefficients a few years ago. The aim of this paper is to focus attention on the NPLs and the possibility of their growth, as well as the discovery of new models for controlling them. In this paper, the method of analysis shows indicators of banking sector's profitability, total loans and non-performing loans from the onset of the crisis to date. Hypothesis set in this paper is that the participation of non-performing loans in the banking sector of Republika Srpska is too great and threatens loan activities and successful business operation. After a bad experience with two banks and serious problems that depositors have been facing, as they have not received their money and it is questionable whether they will ever get it, it is necessary to more thoroughly monitor business operations of each bank as well as the overall banking sector in order to react in time to prevent major problems.

Corporate Finance Practices in Sri Lanka

The aim of this study was to investigate the use of corporate finance practices in terms of capital budgeting, cost of equity capital and capital structure in Sri Lanka. A comprehensive primary survey was conducted of 38 out of 150 financial officers of companies listed on the Colombo Stock Exchange (CSE) in Sri Lanka. Stratified random sampling was used to select the participants in order to represent the different sectors in CSE. Collected data were then analyzed by applying mean and percentage analysis. Results of the survey revealed that NPV was the most frequently ?always? cited capital budgeting method, followed by IRR and PB. CAPM was the most preferred method to calculate the cost of equity capital followed by average historical rate of return on common stock. Remarkably, most firms would use a discount rate for entire company to evaluate the project. Further, it was evaluated that how finance professionals make adjustments for risk factors. It was concluded that risk of unexpected inflation, interest rate risk, term structure risk, business cycle risk, size based risk, market to book ratio and momentum were mostly adjusted by discount rate while commodity price risk, foreign exchange risk and distress risk were mostly adjusted by cash flow. Further, this study was to find out whether Sri Lankan finance professionals behave as expected by pecking order theory of capital structure patterns. Findings of the study are in line with the pecking order theory that firms are having preference to internal finance for their capital. This research has proffered a more reliable and comprehensive analysis of corporate finance practices in Sri Lankan companies.

Integrated Financial and Operational Risk Management of Foreign Exchange Risk, Input Commodity Price Risk and Demand Uncertainty

In this paper, we study the risk management performance of a supply chain which is exposed to foreign exchange risk, commodity price risk and demand uncertainty. We develop an integrated risk management model which uses both financial derivatives and operational methods to hedge the supply chain risks. Findings are discussed for the cases of exchange rate risk with and without hedging.

An Investigation of Foreign Exchange Risk Management by New Zealand and Vietnamese Exporting Small and Medium Sized Enterprises

An Investigation of Foreign Exchange Risk Management by New Zealand and Vietnamese Exporting Small and Medium Sized Enterprises

Does Corporate Hedging Enhance Shareholder Value? A Meta-Analysis

The theories underpinning corporate use of derivatives are well developed. Furthermore, there exist compelling economic reasons why hedging should lead to enhanced shareholder value, but empirical evidence in support of a substantial value increase from hedging is, at best, mixed. In this paper, we synthesize the empirical evidence for value enhancement in firms’ hedging with derivatives using a statistical meta-analysis combining data from 47 different studies. Our findings indicate that firms’ hedging with derivatives have larger Tobin’s Q, a commonly used measure of value creation. A variety of moderating variables are assessed, providing evidence of heterogeneity in the value relevance of corporate hedging. In particular, we find that relatively higher firm value is primarily associated with hedging of foreign exchange risk.

Modelling Kenyan Foreign Exchange Risk Using Asymmetry Garch Models and Extreme Value Theory Approaches

The Foreign Exchange Market in developing countries, Kenya being one of them is a key driving force for the development of a country economic growth. In the last decade, world financial markets have been characterized by significant instabilities and the currency exchange rate market is not an exception. As a consequence of the significant instabilities in the financial markets, this paper models the tail risk associated with the Kenya Shilling against the leading currencies, especially the one day ahead Value-at-Risk forecast in risk control, by using the two leading alternatives, the two-stage GARCH-EVT approach and the asymmetry GARCH models. In practice by applying the conditional Extreme Value Theory, the tail behaviour of the daily returns is modelled and thus the VaR while by using the asymmetry GARCH models, one models the whole distribution of the returns and thereafter estimates the Value at Risk. In addition to modelling the value at risk, we further examine the performance of the two leading alternatives with the daily log returns of leading currencies in the Kenyan Foreign Exchange market (US dollar, Sterling Pound and Euro) foreign currencies from the period January 2005 – August 2017 for trading days excluding weekends and holidays. The backtesting result indicate that the conditional Extreme Value Theory does not completely dominate the asymmetry GARCH models in estimating the VaR especially in the Sterling Pound and Euro Exchange Rates.

A Study on the Effect of Foreign Exchange Risk Insurance on Korea Exports by Firm Size

A Study on the Effect of Foreign Exchange Risk Insurance on Korea Exports by Firm Size

An Introduction to Foreign Exchange (FX) Risk Management

The purpose of this paper is to provide a first look to the management of the Foreign Exchange risk.

Does Brownian Risk Matter in Debt or Equity Issuance and Repurchase Decision in Indian Non-Financial Companies?

External commercial borrowings (ECBs) of Indian non-financial firms have grown by 107 % in past few years. Looking at the high reliance of firms on external debt, this paper investigates the effect of foreign exchange, interest rate and firm specific risk on the debt issuance and retirement decision. It also investigates the factors affecting equity issuance and retirement decision of the firms. Foreign exchange risk and interest rate risk is estimated using stochastic volatility and GARCH (1,1) methods. Firm specific risk is calculated using Black-Scholes Merton model for company valuation. The results highlight that interest rate risk negatively affects the debt issuance and positively affects debt retirement decision of the firms. However, the foreign exchange risk does not affect debt issuance and retirement decision. Firm-specific risk negatively affects propensity of debt issuance of firms but plays no role in debt retirement. Foreign exchange risk, firm-specific risk, and profitability negatively affect propensity of issuance of debt to issuance of equity. This result supports the view that risky firms are more likely to finance their capital needs via new equity issues rather than by new debt issues to avoid the high-risk premium and to limit the likelihood of bankruptcy.