Hedging foreign exchange rate riskMulti-currency diversification

  1. Susana Álvarez-Díez 1
  2. Eva Alfaro-Cid 2
  3. Matilde O. Fernández-Blanco 3
  1. 1 University of Murcia, Department of Quantitative Methods for the Economy
  2. 2 Instituto Tecnológico de Informática
    info

    Instituto Tecnológico de Informática

    Valencia, España

    ROR https://ror.org/02s69db58

  3. 3 University of Valencia, Department of Corporate Finance
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Revista:
European journal of management and business economics

ISSN: 2444-8494,  2444-8451

Año de publicación: 2016

Volumen: 25

Número: 1

Páginas: 2-7

Tipo: Artículo

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Otras publicaciones en: European journal of management and business economics

Resumen

This article proposes a multi-currency cross-hedging strategy that minimizes the exchange risk. The use of derivatives in small and medium-sized enterprises (SMEs) is not common but, despite its complexity, can be interesting for those with international activities. In particular, the reduction in the exchange risk borne through the use of natural multi-currency cross-hedging is measured, considering Conditional Value-at-Risk (CVaR) and Value-at-Risk (VaR) for measuring market risk instead of the variance. CVaR is minimizedusinglinearprogrammes,whileamultiobjectivegeneticalgorithmisdesignedforminimizing VaR, considering two scenarios for each currency. The results obtained show that the optimal hedge strategy that minimizes VaR is different from the minimum CVaR hedge strategy. A very interesting point is that, just by investing in other currencies, a significant risk reduction in VaR and CVaR can be obtained.

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