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عنوان انگلیسی مقاله:
Hedging foreign exchange rate risk: Multi-currency diversification
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مقدمه انگلیسی مقاله:
1. Introduction
Over the last few decades, changes in exchange rates have been a major risk for companies around the world. This is particularly true for firms with foreign currency-based activities, such as imports and exports, and corporate cash flows. Thus firm value is dependent on exchange rates, rendering the management of foreign exchange rate risk an important corporate objective and activity. It is accepted that a firm exhibits exchange rate exposure if its value is affected by changes in exchange rates (Adler and Dumas, 1984). The main hedging motives are the minimization of the impact of foreign exchange rate fluctuations on the variability of the firm’s operational cash flow and the reduction of the probability of financial distress and bankruptcy (Hagelin, 2003; Solomon & Joseph, 2000). This and other similar problems have been widely analyzed in the related literature. It is not only corporations that exhibit exchange rate exposure. Individuals can also be affected; for example, when they apply for a multi-currency mortgage. Both corporations and individuals wish to protect themselves and reduce the risk in an effective way. While in many cases it would clearly be more effective to hedge a long currency position using currency futures, there are situations where currency crosshedging may be appropriate. A medium size company that operates in two or three countries with different currency simultaneously can reduce its income risk by engaging in a hedging activity of assets correlated with the foreign rate. The use of derivatives in small and medium-sized enterprises (SMEs) is not very common (Pennings and Garcia, 2004) and becomes more complicated because of their nature. Given this complexity, multi-currency cross-hedging can be more appropriate. In general, cross-hedging is a hedging strategy where future contracts on different deliverable instruments are used. Corporations and individuals that have exposure to two or more currencies simultaneously can use cross-hedging. An efficient approach to hedging this risk exposure is to first exploit the natural cross-hedge that arises from the non-zero correlation between the different currency exposures, and then to use derivatives to hedge the residual risk. There are different ways to measure the risk to hedge. The classical measurement of risk is the variance, but nowadays researchers and practitioners tend to focus on Value-at-Risk (VaR) and Conditional Value-at-Risk (CVaR) as market risk measures. The VaR of a portfolio is the lowest amount which the loss will not exceed with probability 1 − ˛. CVaR is the conditional expectation of losses above the VaR.VaR became very popular due to the fact that Basel Committee assumed VaR as a risk measurement and that the regulatory capital for a loan is correlated to its marginal contribution to VaR. However, the use and acceptance of CVaR have increased because, in contrast to VaR, it meets expected properties. It informs us about how much we could lose if the portfolio return falls beyond VaR. Moreover, it is a convex risk measurement which makes it easy to use to set optimal strategies in optimization problems. Alfaro-Cid, BaixauliSoler, and Fernández-Blanco (2011), Baixauli-Soler, Alfaro-Cid, and Fernández-Blanco (2010) and Baixauli-Soler, Alfaro-Cid, and Fernández-Blanco (2011) used several risk measures and different approaches to solve classical portfolio optimization problems, and, among other conclusions, they showed that using the variance as risk measure provides the same results than using CVaR. Therefore, using both simultaneously in multiobjective problems is not recommended. In this context, the main aim of this paper is to establish the reduction in the exchange risk borne through the use of natural multi-currency cross-hedging considering VaR and CVaR as measures of market risk. For this, the mid exchange rates for 10 developed market currencies against the euro from January 1999 to December 2009 were used. The approach presented in this paper is useful for implementing a multi-currency hedge strategy and it contributes to the literature in several ways. Firstly, it combines the use of VaR and CVaR as measures of risk with the use of multi-currency cross-hedging as instrument of hedging. The majority of papers in the literature use variance and derivatives, mainly current futures, for these purposes. Secondly, the approach of minimum hedge ratio and the mean-risk hedge are used. Thirdly, a multiobjective genetic algorithm is proposed to determine a mean-VaR hedge ratio. The paper is organized as follows. The second section explains the determination of the hedge ratio and considers different measures of risk. The third section sets out the methodology to compute the mean-CVaR and mean-VaR hedge ratios. The fourth section describes the multiobjective genetic algorithm used to obtain mean-VaR hedge ratio. The fifth section presents the data and empirical results. Finally, the last section summarizes the main findings of the research.
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کلمات کلیدی:
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