An Empirical Study of Forex Risk Management Strategies
Indian Journal of Finance, Vol. II, No. 8, December 2008
14 Pages Posted: 18 Jan 2009
Date Written: April 15, 2008
There are a variety of strategies which are designed to manage foreign exchange risk. Each of them, however, is constructed under specific assumptions, for a specific risk profile. It is often the case that several strategies are applicable to a given scenario. The question arises as to which strategy would be expected to yield the best results in a given scenario.
The current study addresses this issue empirically, using a set of simulated foreign exchange cash flows to compare the profits resulting from the use of different foreign exchange risk management strategies. The risk management strategies considered for the study are: forward currency contacts, currency options, and cross-currency hedges. The study analyzes and evaluates these foreign exchange risk management strategies to find out which of the strategies is appropriate in particular situations.
Keywords: foreign exchange risk, risk management strategies, forward currency contracts, currency options, cross-currency hedge
JEL Classification: F31, G12
Suggested Citation: Suggested Citation