Hedging Effectiveness Assessment of the US Currency Risk by Forward Foreign Exchange Contracts

• Main Authors: Hsien-ming Kao, 高賢明
• Other Authors: Ender Su
• Format: Others
• Language: zh-TW
• Published: 2004
• Online Access: http://ndltd.ncl.edu.tw/handle/79906130382260358760

碩士 === 國立高雄第一科技大學 === 風險管理與保險所 === 92 === This thesis takes the spot and forward exchange rates of US dollar for New Taiwan dollar at foreign exchange rate market as a hedging example, and makes comparisons among different dates of forward exchange rate contracts using static and dynamic hedging methods and analyzing the hedging performance for three models: the error correction, the M-GARCH and the threshold GARCH models in my paper. As a consequence of the empirical analysis, the error correction model of the static hedging analysis obtains a outcome: the spot exchange rate and forward exchange rate are affected by economic factors, and for the long-term period, they will be adjusted gradually with error correction that is the cointegration term between spot exchange rate and forward exchange rate to reach the long run balance condition. The difference forward rate contract hedging ratios are ranging from around 0.93 to 0.97. Consequently, the hedging effectiveness of the hedged portfolio outperforms non-hedged portfolio in the long run and the variance of the hedged portfolio can be reduced by approximately 88.67% to 94.49%. The error correct model shows that the change speed of forward foreign exchange market error correction’s parameters is obviously greater than spot exchange rate's. In addition, the forward exchange rate is inclined to approach toward the long term equilibrium, and the forward exchange rate is more responsive to market information than the spot exchange rate. For the dynamic hedging application of M-GARCH, first we check if both spot and forward have ARCH effects, and then measure its hedging ratios. The mean value of the dynamic hedging ratios is between 0.9 and 1.0 and its standard deviation is between 0.05 and 0.09. This shows the variance of hedging ratios is not quite huge. To reach the optimal dynamic hedging, investors must continue to adjust the hedged portfolio positions. The variance of the hedged portfolio is much less than non-hedged portfolio's by 88.11%~93.73%. This represents the hedged portfolio holds the much slighter exchange rate risk. As to the other dynamic hedging model of the threshold M-GARCH Model, it can separate volatility into four kinds of portfolios with high high, low high, high low, and low low volatilities. From this model, we find that the degree of the hedging ratio standard deviation drop is going to be quite different among four kinds of portfolios. As spot and forward exchange rates are both in high volatility condition, it should be a good time to do portfolio hedging. The hedging ratios differ between 0.86 and 0.93 across different time and the variance of hedged portfolio can be reduced by around 75%~82%. Also, as the fluctuation of the spot exchange rate is larger than the forward exchange rate's, it is not suitable to take the forward exchange rate as the hedging position but to employ cross hedging or the other methods. As the fluctuation of spot exchange rate is low, it is not necessary to do the hedging. We are supposed to pay attention to the time while the exchange rate market becomes in high volatility circumstance. If concerning for hedging cost, we recommend that the threshold M-GARCH model is a good choice of hedging application.