Evaluating hedging strategies in the foreign exchange market with the stochastic dominance approach

Yi-Chein Chiang, Tung Liang Liao and Tse-An Hsiao

Applied Financial Economics, 2011, vol. 21, issue 7, 493-503

Abstract: This study uses stochastic dominance theory, which is distribution free, to evaluate eight foreign exchange hedging strategies for six currencies in terms of US Dollar from 1990 to 2007. Our results show that 'always hedge' is the best performing strategy for European currencies such as British Pound, Euro and Swiss Franc. However, the Forward Hedge Rule (hedging when forward rate is at a premium) generally outperforms the other seven strategies for currencies such as Canadian Dollar, Hong Kong Dollar and Japanese Yen. Our results can be a reference for decision makers to design their hedging strategies in the foreign exchange market.

Date: 2011
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DOI: 10.1080/09603107.2010.532111

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