Currency Hedging for a Multi-national Firm

Markku Kallio (), Matti Koivu () and Rudan Wang ()
Additional contact information
Markku Kallio: Aalto University School of Business
Matti Koivu: Nordic Investment Bank
Rudan Wang: Coventry University

Chapter Chapter 14 in Handbook of Recent Advances in Commodity and Financial Modeling, 2018, pp 297-320 from Springer

Abstract: Abstract This paper develops a multi-stage stochastic programming (SP) approach aiding a European company in currency hedging. While cash management concerns several major currencies, our pilot model deals with US$ and € only. Equilibrium correction models, Taylor rule based models and a random walk model are compared for exchange rate prediction. Risks related to exchange rate and sales forecast errors are hedged. Numerical results indicate that the current hedging policy roughly amounts to the same as no hedging at all. We demonstrate how repeated hedging activity reduces risk and thereby suggests avoid excessive risk averse behavior. Out-of-sample tests over the period 2004–2013 indicate that optimized hedging can increase net profits before taxes by about 20% over current policy. Average performance improvement of the random walk model is outperformed in terms of profit improvement by all other models we considered. Out-of-sample results show that single-stage SP yields approximately the same average improvement as multi-stage SP but the latter is more robust in terms of reduced variance.

Keywords: Exchange rate; Currency hedging; Financial modeling; Stochastic programming (search for similar items in EconPapers)
Date: 2018
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:isochp:978-3-319-61320-8_14

Ordering information: This item can be ordered from
http://www.springer.com/9783319613208

DOI: 10.1007/978-3-319-61320-8_14

Access Statistics for this chapter

More chapters in International Series in Operations Research & Management Science from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().