|
EconStor >
Universität zu Köln >
Centre for Financial Research (CFR), Universität Köln >
CFR Working Papers, Centre for Financial Research (CFR), Universität Köln >
Please use this identifier to cite or link to this item:
http://hdl.handle.net/10419/41380
|
| | |
| Title: | | The term structure of currency hedge ratios  |
| Authors: | | Korn, Olaf Koziol, Philipp |
| Issue Date: | | 2009 |
| Series/Report no.: | | CFR working paper 09-01 |
| Abstract: | | Many firms face product price risk in foreign currency, uncertain costs in home currency and exchange rate risk. If prices and exchange rates in different countries interact, natural hedges of foreign exchange risk might result. If the effectiveness of such hedges depends on the hedge horizon, they might affect a firm's usage of foreign exchange derivatives and lead to a term structure of optimal hedge ratios. We analyze this issue by deriving the variance minimizing hedge position in currency forward contracts of an exporting firm that is exposed to different risks. In an empirical study, we quantify the term structure of hedge ratios for a ' typical ' German firm that is exporting either to the United States, the United Kingdom or Japan. Based on cointegrated vector autoregressive models of prices, interest rates and exchange rates, we show that the hedge ratio decreases substantially with the hedge horizon, reaching values of one half or less for a ten-years horizon. Our findings can (partly) explain the severe underhedging of long-term exchange rate exposures that is frequently observed and have important implications for the design of risk management strategies. |
| Subjects: | | corporate risk management foreign exchange risk hedging cointegrated VAR model |
| JEL: | | F31 G32 |
| Document Type: | | Working Paper |
| Appears in Collections: | | CFR Working Papers, Centre for Financial Research (CFR), Universität Köln
|
| Files in This Item:
| |
|
| No. of Downloads:
| |
| last Month |
last 3 Month |
total |
|
|
|
|
|
| |
| | |
Download bibliographical data as:
BibTeX
|
| |
Share on:http://hdl.handle.net/10419/41380
|
Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.
|