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The natural effect of multi-currency cross-hedging

Berg, Lina LU and Clement, Linda LU (2018) NEKN02 20181
Department of Economics
Abstract
This thesis investigates the power and accuracy of the natural effect of multi-currency cross-hedging, based on the non-zero correlation between currency pairs, with the purpose of deter-mining if this could be a suitable hedging strategy for small- and medium-sized enterprises hav-ing transaction exposure to currency risk. The investigation, performed through an out-of-sample approach, is based on the minimization of the risk measure Conditional Value at Risk. By using a sample of exchange spot rates from 2010 to 2017, divided into two periods, we test a set of hedged portfolios (computed in the setting of a multi-currency cross-hedging strategy) from the estimation period on the data of the test period. The results show that the... (More)
This thesis investigates the power and accuracy of the natural effect of multi-currency cross-hedging, based on the non-zero correlation between currency pairs, with the purpose of deter-mining if this could be a suitable hedging strategy for small- and medium-sized enterprises hav-ing transaction exposure to currency risk. The investigation, performed through an out-of-sample approach, is based on the minimization of the risk measure Conditional Value at Risk. By using a sample of exchange spot rates from 2010 to 2017, divided into two periods, we test a set of hedged portfolios (computed in the setting of a multi-currency cross-hedging strategy) from the estimation period on the data of the test period. The results show that the investigating hedging strategy performs poorly already in the estimation period, and even worse when applied to the test period. The conclusion of this thesis is that the natural effect of multi-currency cross-hedging lacks power and accuracy over time, probably due to the instability of correla-tions between periods, and is therefore not considered as a suitable hedging strategy for small- and medium-sized enterprises. (Less)
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author
Berg, Lina LU and Clement, Linda LU
supervisor
organization
course
NEKN02 20181
year
type
H1 - Master's Degree (One Year)
subject
keywords
Multi-currency cross-hedging, Small- and medium-sized enterprises, Conditional Value at Risk, Exchange rate risk
language
English
id
8947512
date added to LUP
2018-07-02 15:41:42
date last changed
2018-07-02 15:41:42
@misc{8947512,
  abstract     = {This thesis investigates the power and accuracy of the natural effect of multi-currency cross-hedging, based on the non-zero correlation between currency pairs, with the purpose of deter-mining if this could be a suitable hedging strategy for small- and medium-sized enterprises hav-ing transaction exposure to currency risk. The investigation, performed through an out-of-sample approach, is based on the minimization of the risk measure Conditional Value at Risk. By using a sample of exchange spot rates from 2010 to 2017, divided into two periods, we test a set of hedged portfolios (computed in the setting of a multi-currency cross-hedging strategy) from the estimation period on the data of the test period. The results show that the investigating hedging strategy performs poorly already in the estimation period, and even worse when applied to the test period. The conclusion of this thesis is that the natural effect of multi-currency cross-hedging lacks power and accuracy over time, probably due to the instability of correla-tions between periods, and is therefore not considered as a suitable hedging strategy for small- and medium-sized enterprises.},
  author       = {Berg, Lina and Clement, Linda},
  keyword      = {Multi-currency cross-hedging,Small- and medium-sized enterprises,Conditional Value at Risk,Exchange rate risk},
  language     = {eng},
  note         = {Student Paper},
  title        = {The natural effect of multi-currency cross-hedging},
  year         = {2018},
}