Hedging foreign exchange rate risk: Multi-currency diversification

• Susana Álvarez-Díez ^[1] ; Eva Alfaro-Cid ^[2] ; Matilde O. Fernández-Blanco ^[3]
  1. [1] Universidad de Murcia

     Universidad de Murcia

     Murcia, España

     
  2. [2] Instituto Tecnológico de Informática

     Instituto Tecnológico de Informática

     Valencia, España

     
  3. [3] Universitat de València

     Universitat de València

     Valencia, España

     

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• Localización: European journal of management and business economics, ISSN-e 2444-8494, ISSN 2444-8451, Vol. 25, Nº. 1, 2016, págs. 2-7
• Idioma: inglés
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• Dialnet Métricas: 1 Cita
• 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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