A Research of Currency Basket Hedging Model for Taiwanese Exporters

• Main Authors: Tseng,Li-Fang, 曾麗芳
• Other Authors: Hung,Ming-Chin
• Format: Others
• Language: zh-TW
• Published: 2013
• Online Access: http://ndltd.ncl.edu.tw/handle/94662192917839119979

碩士 === 東吳大學 === 財務工程與精算數學系 === 101 === International trade brings many business opportunities to local enterprises. Nonetheless, it also implies companies engaged in exporting business face higher foreign exchange (FX) exposure. Exports accounted for a significant proportion of GDP in Taiwan. As a result, exporters have genuine demand to hedge foreign exchange exposure. A lot of Taiwanese exporters intend to hedge to prevent their daily operation from volatile foreign exchange rate movement but with limited selections. In general, exporters mainly hedge through DF (Deliverable Forward). However, the downside of DF is higher cost of hedging. Average hedging cost for DF; from 2005 to 2007, was more than 3%. Even the U.S. started implementing QE (Quantitative Easing) in 2008, which led to a narrower interest spread between the U.S. and Taiwan, the average hedging cost was still approximate 1.3%. In longer term, the cost by choosing DF as a hedging tool is substantial. We therefore would like to build up a basket of currencies model in hopes that such model is able to lower hedging cost (or even bringing in benefits) to facilitate Taiwanese exporters circumventing foreign exchange exposure. Our study is to establish a hedging model with a basket of currencies. Based on practical working experiences, currencies traded with higher frequency or received more attention from Central Bank of Taiwan (CBC) will be selected. Among these currencies, a group of high-yield currencies whose rate of return is similar to it of USD/TWD spot rates will be filtered through, in hopes to further reduce hedging costs for exporters to settle the net positions of the foreign currency exposure (In this article net position is referred to as exporters’ U.S. dollar account receivables minus U.S. dollar account payables. Under this circumstance, net FX exposure for Taiwanese exporters is long net U.S. assets, due to the fact that exporters in Taiwan usually have higher U.S. dollar accounts receivable over U.S. dollar accounts payable). After the Basket model is established, the strategy required to be performed is: A basket of currencies hedging model accompanies with naked portions without any hedging activities. (U.S. dollar collected from exporters' net FX position, i.e. net U.S. dollar receivables, will be sold directly at spot rate in the market) Such execution will truly reflect the profit or loss result from this model. The empirical results of our study have shown that regardless of which data duration is used; e.g. yearly, quarterly or monthly length of data to construct the Basket with optimal weightings, the strategy that a basket of currencies hedging model accompanies with naked portions without any hedging activities significantly outperformed conventional USD/TWD DF hedging tool. However, standard deviation of this strategy also increased. In the Basket model containing three different data length with respective optimal weightings, yearly data bring the most satisfying results. Additionally, our study indicates in the face of major global financial event, aforementioned strategy generated rate of return opposite to it of naked positions. That is, no-hedging strategy generated negative rate of return whereas our strategy generate positive one, and vice versa. When encountering a "black swan event", our Basket model is still able to function rather than the conventional one. That said, this study covers only 7 years of period so further observation is required. For exporters focusing more on cost-saving of hedging activities, our study suggested using Basket model containing yearly data. Consequently, aforementioned strategy (a basket of currencies hedging model accompanied with naked portions) derived the best outcome, in comparison with the hedging cost of traditional USD/TWD DF method. On the other hand, traditional USD/TWD hedging tools is more suitable for exporters who are more averse to volatile exchange rate movement.