Evaluation of options portfolios for exchange rate hedges

Miguel Jimenez, Natalia Acevedo, Miguel Rojas

Abstract


In this paper evaluate six exchange rate hedging strategies with financial options from the OTC market in Colombia. Three hedging strategies for importers and three for exporters were raised. The coverage for importers was carried out with the traditional strategy of Long Call, Bull Call Spread and Bull Put Spread, the last two correspond to options portfolios. The coverage for importers was carried out with the traditional strategy of Long Put, Bear Call Spread and Bear Put Spread, the last two correspond to options portfolios. To determine the best hedging strategy, the currency price was modeled with a Wiener process and the VaR for the six covered scenarios was calculated and compared with the VaR of the uncovered scenario. The results shown by the six hedging strategies manage to mitigate the exchange risk, but the most efficient strategies are the traditional ones for both importers and exporters.


Keywords


Exchange rate hedges, Options portfolios, Value at Risk

References


G. Li, J. Zhu, and J. Li, “Understanding bilateral exchange rate risks,” J. Int. Money Financ., vol. 68, pp. 103–129, 2016.

X. Yu, Z. Wan, X. Tu, and Y. Li, “The optimal multi-period hedging model of currency futures and options with exponential utility,” J. Comput. Appl. Math., vol. 366, p. 112412, 2020.

E. Hutson, E. Laing, and M. Ye, “Mutual fund ownership and foreign exchange risk in Chinese firms,” J. Int. Financ. Mark. Institutions Money, vol. 60, pp. 169–192, 2019.

M. M. Arnold, A. W. Rathgeber, and S. Stöckl, “Determinants of corporate hedging: A (statistical) meta-analysis,” Q. Rev. Econ. Financ., vol. 54, no. 4, pp. 443–458, 2014.

Y. Ayturk, A. Osman, and S. Yanik, “Corporate derivatives use and firm value: Evidence from Turkey,” Borsa Istanbul Rev., vol. 16, no. 2, pp. 108–120, 2016.

J. Chen and T. D. King, “Corporate hedging and the cost of debt,” J. Corp. Financ., vol. 29, pp. 221–245, 2014.

C. W. Smith and R. M. Stulz, “The Determinants of Firms Hedging Policies,” J. Financ. Quant. Anal., vol. 20, no. 4, pp. 391–405, 1985.

D. Sprcic and Z. Sevic, “Determinants of corporate hedging decision: Evidence from Croatian and Slovenian companies,” Res. Int. Bus. Financ., vol. 26, pp. 1–25, 2012.

D. M. Sprčić, M. Tekavcic, and Z. Sevic, “A review of the rationales for corporate risk management: fashion or the need?,” Int. J. Econ. Sci. Appl. Res., vol. 1, pp. 71–99, 2008.

T. Ito, S. Koibuchi, K. Sato, and J. Shimizu, “Exchange rate exposure and risk management: The case of Japanese exporting firms,” J. Jpn. Int. Econ., vol. 41, pp. 17–29, 2016.

S. Álvarez-díez, E. Alfaro-cid, and M. O. Fernández-blanco, “European Journal of Management Hedging foreign exchange rate risk : Multi-currency diversification,” vol. 25, pp. 2–7, 2016.

P. Jorion, Value at Risk: The New Benchmark for Managing Financial Risk. New York: McGraw Hill, 2002.

W. Guo, X. Yu, and Y. Jun, “Trade and currency options hedging model,” J. Comput. Appl. Math., vol. 343, pp. 328–340, 2018.

M. C. Chuang, C. H. Wen, and S. K. Lin, “Valuation and empirical analysis of currency options,” Int. Rev. Econ. Financ., vol. 66, no. November 2019, pp. 71–91, 2020.

K. H. Kim, N. U. Kim, D. C. Ju, and J. H. Ri, “Efficient hedging currency options in fractional Brownian motion model with jumps,” Phys. A Stat. Mech. its Appl., vol. 539, p. 122868, 2020.

M. Barjaktarović, D. Karic, and R. Zecevic, “Currency options in function of currency risk hedging and speculating,” Econ. Anal., vol. 44, no. 2, pp. 38–46, 2011.

E. Bajo, M. Barbi, and S. Romagnoli, “Optimal corporate hedging using options with basis and production risk,” North Am. J. Econ. Financ., vol. 30, pp. 56–71, 2014.

D. Lien and Y. Tse, “Hedging downside risk: futures vs. options,” Int. Rev. Econ. Financ., vol. 10, no. 2, pp. 159–169, 2001.

A. Judge, “Why and how UK firms hedge,” Eur. Financ. Manag., vol. 12, no. 3, pp. 407–441, 2006.

C. S. Tai, “Asymmetric currency exposure and currency risk pricing,” Int. Rev. Financ. Anal., vol. 17, no. 4, pp. 647–663, 2008.

K. M. E. Dominguez and L. L. Tesar, “Exchange rate exposure. Journal of International Economics,” J. Int. Econ., vol. 68, no. 1, pp. 188–218, 2006.

J. F. Solomon and N. L. Joseph, “Which corporate hedging motives are appropriate? An institutional shareholders’ perspective,” Int. J. Financ. Econ., vol. 5, pp. 339–347, 2000.

H. Kleinert and J. Korbel, “Option pricing beyond Black – Scholes based on double-fractional diffusion,” Physica A, vol. 449, pp. 200–214, 2016.

J. Hull, Options, futures, and other derivatives, 8th ed. Boston: Pearson Education, 2012.

F. Black and M. Scholes, “The pricing of options and corporate liabilities,” J. Polit. Econ., vol. 81, pp. 637–654, 1973.




DOI: http://doi.org/10.11591/ijeecs.v21.i1.pp%25p
Total views : 4 times

Refbacks



Creative Commons License
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

shopify stats IJEECS visitor statistics