The question arises as to which strategy would be expected to yield the best results in a given scenario. The current study addresses this issue empirically, using a set of simulated foreign exchange cash flows to compare the profits resulting from the use of different foreign exchange risk management strategies. The risk management strategies considered for the study are: The study analyzes and evaluates these foreign exchange risk management strategies to find out which of the strategies is appropriate in particular situations.
Electronic copy available at: The question arises as to. The current study addresses this issue empirically, using a set of simulated foreign exchange. The risk management strate gies considered for the study are: Th e study analyzes and. In the world of globalization a nd international business, firms would be performing one or the. This would expose them to foreign. Foreign exchange risk management has always b een an attractive field for many researchers.
Nevertheless, there is no uniformly accepted defi nition of foreign exchange risk management. Baldoni, ; Rahardjo an d Dowling, ; Ankrom, have provided. Among the first authors to define foreign.
He classified foreign exchange exposures into translation,. Translation e xposure is the accountant's record of profit and. Transaction exposure is the. Lastly, economic exposure is the combination of. Ankrom argued that economic exposure is a. There have been several recent studies on fore ign exchange risk management which have. Murray studied two types of risk associated with foreign currency denominated assets and.
Transaction risk is the risk one incurs whenever they physically convert from one. Translation risk is the risk on e incurs when they hold a ssets or liabilities in a. These two risks can be related if one takes the example of a sale of goods in a.
Holding the accounts receivable ove r the end of a closing pe riod will result in. Abor suggested that fore ign exchange risk is mainly managed by adjusting prices to. The main problems that firms face are the frequent. Jesswein et al studied th e usage pattern of foreign exch ange management strategies by. They find that the popularity of the simpler, fi rst-generation product forward. Yazid and Muda studied the usage pattern of foreign exchange management strategies in.
They found that multinat ionals are involved in foreign exchange risk. Also, the majo rity of multination als centralise their risk. It is likely that huge financia l losses related to deriva tive trading in the past.
Though many studies have revealed that active currency management by using derivatives is. According to Copeland and Joshi. Hedging theories a ssume a static world in which. In addition, the relationships. Hard enough to unde rstand in hindsight, they are. Although derivatives are generally in effective in. Even though the study was against using. The management of foreign exchan ge risk involves three questions. First, what exchange risk. Second, based on the nature of the exposure and th e firm's ability to forecast currencies, what.
And finally, which of. This study deals with the various strategies of managing transaction, translation and economic. For the pur pose of the study, one. The effects of usi ng hedging strategies such as forward currency.
The objective of the st udy was to identify stra tegies which not only. The data for the study was collected thr ough secondary sources like books, websites and. The research period chosen was April to March Interest ra te parity was calculated using the inter-bank offering rates of.
Purchasing power parity was calculated by using inflation rates in India and USA as at the. Using these data, the returns und er. The following foreign exchange risk mana gement strategies were considered: This represents the base series of cash flows in INR, when the.
This is the most ris ky way of handling internat ional financial exposure. According to this strategy, transactions will take place at the corresponding spot exchange rate. Hedging with forward currency contacts: According to this strategy, the trader will. The forward rates were cal culated giving equal weight to Interest Rate. Parity and Purchasing Power Parity. The interest rates and inflation rates used for the. Hedging with currency options: According to this strategy, the trader will enter into a.
A series of outflows of foreign curre ncies can be hedged by buying currency call options,. According to this strategy, the trader will enter into a contract. In th e selected research peri od, it was found that the. The realized net cash flows in INR were calculated for each of the sample cash flows, under each.
For infl ows a profit resulted if the actual receipts were. This was applied for each of the. The means and standard deviations of the return s for the series of ca sh flows under different. For the series of inflows, it. For the series of outflows, it was found that the options. The paired-samples t-tests indicated th at the differences in mean retu rns between all.
The paired-samples t-tests indicate d that the differences in mean returns between. For the series of inflows,. It is always risky to remain unhedged against foreign exchange rate fluctuations. This in turn depends on the how th e situation is analyzed. From the results of the study, for currency outfl ows, hedging with currency options contracts was. While using currency options, one should be careful in selecting the right strike price.
It would be an. A major limitation of the study was in considering only a few foreign exchange risk management. For example, the strike price used in the study.
There is a vast scope for further research in this area. Furthermore, several other foreign. Another limitation is that the study did not. In particular, there is scope fo r further research into the relationship between.
Finally, the study has used historical data to compare the strategies, so that the. International Cor porations Manage.
Risk Management Society Pu blishing, Inc. Indian inflation US inflation. Citations Citations 1 References References The present study has extended the analysis of Dash et al in comparing the performance of different hedging strategies, approaching the problem from the point of view of exchange rate dynamics, using a model for exchange rate movements.More...