Dual and single hedging strategy: a novel comparison from the direct and cross hedging perspective

Yun Feng and Yan Cui

China Finance Review International, 2020, vol. 12, issue 1, 161-179

Abstract: Purpose - The purpose of this paper is to deeply study and compare the dual and single hedging strategy, from the direct and cross hedging perspective. Design/methodology/approach - The authors not only first consider the dual hedge of integrated risks in this oil prices and foreign exchange rates setting but also make a novel comparison between the dual and single hedging strategy from a direct and cross hedging perspective. In total, six econometric models (to conduct one-step-ahead out-of-sample rolling estimation of the optimal hedge ratio) and two hedging performance criteria are employed in two different hedging backgrounds (direct and cross hedging). Findings - Results show that in the direct hedging background, a dual hedge cannot outperform the single hedge. But in the cross dual hedging setting, a dual hedge performs much better, possibly because the dual hedge brings different levels of advantages and disadvantages in the two different settings and the superiority of the dual hedge is more obvious in the cross dual hedging setting. Originality/value - The existing literature that deals with oil prices and foreign exchange rates mostly concentrates on their relationship and comovements, while the dual hedge of integrated risks in this setting remains underresearched. Besides, the existing literature that deals with dual hedge gets its conclusions only based on a single specific background (direct or cross hedging) and lacks deeper investigation. In this paper, the authors expand the width and depth of the existing literature. Results and implications are revealing.

Keywords: Dual hedge; Single hedge; Minimum variance; Integrated risk; Correlation (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eme:cfripp:cfri-05-2020-0053

DOI: 10.1108/CFRI-05-2020-0053

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