Exchange rate risk management for contractors within a hybrid payment scheme: a case study in Punta del Este, Uruguay

Martín Egozcue

Journal of Risk Model Validation

Abstract: This paper investigates the strategies contractors can employ to mitigate the exchange rate risks in hybrid payment systems. In our analysis, contractors face exchange rate risk, due to mismatches between their revenue and cost currencies, as well as property price risk, since they receive a portion of their revenue in the form of dwelling units. We rigorously compare the performance of three distinct risk models within the context of real estate development in Punta del Este, Uruguay. By evaluating these models against empirical data from a hypothetical project, our research provides valuable insights into their effectiveness in managing exchange rate risk. This addresses the critical need to validate risk models in the emerging real estate market of Punta del Este. Our analysis demonstrates a significant reduction in risk and higher expected profits compared with strategies that do not involve hedging.

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