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RESEARCH PRODUCT
Hedging foreign exchange rate risk: Multi-currency diversification
Matilde O. Fernández-blancoEva Alfaro-cidSusana ÁLvarez-díezsubject
Organizational Behavior and Human Resource ManagementEconomicsFinancial economicsStrategy and Management0211 other engineering and technologiesDiversification (finance)02 engineering and technologyConditional Value-at-Riskddc:6500502 economics and businessEconometricsEconomicsBusinessG32G11Business and International ManagementHedge (finance)Rate riskMarketing021110 strategic defence & security studiesCVAR05 social sciencesValue-at-RiskBusiness FinanceManagementExpected shortfallC63Market riskCurrencyTourism Leisure and Hospitality ManagementMulti-currency diversificationMultiobjective genetic algorithm050211 marketingFinanceValue at riskCross-hedgingdescription
Abstract This article proposes a multi-currency cross-hedging strategy that minimizes the exchange risk. The use of derivatives in small and medium-sized enterprises (SMEs) is not common but, despite its complexity, can be interesting for those with international activities. In particular, the reduction in the exchange risk borne through the use of natural multi-currency cross-hedging is measured, considering Conditional Value-at-Risk (CVaR) and Value-at-Risk (VaR) for measuring market risk instead of the variance. CVaR is minimized using linear programmes, while a multiobjective genetic algorithm is designed for minimizing VaR, considering two scenarios for each currency. The results obtained show that the optimal hedge strategy that minimizes VaR is different from the minimum CVaR hedge strategy. A very interesting point is that, just by investing in other currencies, a significant risk reduction in VaR and CVaR can be obtained.
| year | journal | country | edition | language |
|---|---|---|---|---|
| 2016-01-01 | European Journal of Management and Business Economics |