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1 – 10 of over 7000Jeff Madura, Alan L. Tucker and Emilio Zarruk
Since the early 1980s, currency options have become a popular means for hedging foreign currency positions or speculating on anticipated movements in exchange rates. Yet, they can…
Abstract
Since the early 1980s, currency options have become a popular means for hedging foreign currency positions or speculating on anticipated movements in exchange rates. Yet, they can also be used to enhance the forecasting of exchange rates. Corporate forecasts of exchange rates involve two tasks: (1) a point estimate of a currency's exchange rate, and (2) a confidence interval that suggests the degree of uncertainty associated with the point estimate forecast. A currency forward or futures price is often used as the point estimate required. The confidence interval is commonly developed by using the historical volatility of exchange rate movements. However, an alternative method is to use the market's anticipated volatility in developing the confidence interval. Scott and Tucker (1990) have shown that the volatility implied from contemporaneous currency option prices is a better forecast of future volatility than historical measures. Therefore, a confidence interval implied by currency options should also be more reliable. Our objective is to illustrate how confidence intervals can be developed from currency option information. Given the degree of difficulty in forecasting exchange rates, more reliable confidence intervals could greatly improve managerial decisions.
Nicholas R. Gardner, Jonathan D. Ritschel, Edward D. White and Andrew T. Wallen
This paper examines the opportunity cost of applying simple averages in formulating the Department of Defense (DoD) budget for foreign exchange rates. Using out-of-sample…
Abstract
This paper examines the opportunity cost of applying simple averages in formulating the Department of Defense (DoD) budget for foreign exchange rates. Using out-of-sample validation, we evaluate the status quo of a center-weighted average against a Random Walk model, ARIMA, forward rates, futures contracts, and a private firm's forecasts over two time periods extending from Fiscal Year (FY) 1991 to FY 2014. The results strongly indicate that four of the alternative methods outperform the status quo over the shorter time period, and three methods for both time periods. Furthermore, a non-parametric comparison of the median error demonstrates statistical similarities between the four alternative methods over the short term. Overall, the paper recommends using the futures option prices to decrease forecast error by 3.23% and avoiding a $34 million opportunity cost.
A multinational firm in its normal, day to day conduct of business becomes vulnerable to potential gains and losses due to changes in the values of its assets and liabilities that…
Abstract
A multinational firm in its normal, day to day conduct of business becomes vulnerable to potential gains and losses due to changes in the values of its assets and liabilities that are denominated in foreign currencies. Exporting, importing, and investing abroad expose the firm to foreign exchange risks. Under the 1944 Bretton Woods Agreement, Central Bank interventions in foreign currency markets were frequent, with relatively minor changes in exchange rates. Managers then could afford to ignore foreign exchange exposure. However, with the demise of the Agreement in 1973, exchange rates for major currencies have fluctuated freely, sometimes wildly. These currency fluctuations constantly change the values of foreign currency assets and liabilities, thereby creating foreign exchange risks. Managing these foreign exchange risks now constitutes one of the most difficult and persistent problems for financial managers of multinational firms.
Changes in the financial and competitive environment have been a recurring stimulus to corporate reappraisal of foreign exchange risk management (FERM) policy. In 14 UK company…
Abstract
Changes in the financial and competitive environment have been a recurring stimulus to corporate reappraisal of foreign exchange risk management (FERM) policy. In 14 UK company cases studied by the author, treasurers identified the following competitive and financial environmental influences on FERM policy.
Tom Copeland, Tim Roller and Jack Murrin
When the time comes to make a European acquisition or divestiture, you will be relieved to have this step‐by‐step guide to valuing a multinational business on hand. This article…
Abstract
When the time comes to make a European acquisition or divestiture, you will be relieved to have this step‐by‐step guide to valuing a multinational business on hand. This article, written from the point of view of a finance executive, is adapted from Valuation: Measuring and Managing the Value of Companies.
Francisco Carrada‐Bravo, Hassan K. Hosseini and Lorenzo Fernandez
The purpose of this article is to investigate the return associated with a Canadian dollar (C$) investment in the USA under passive, random walk, value at risk, and Sharpe ratio…
Abstract
Purpose
The purpose of this article is to investigate the return associated with a Canadian dollar (C$) investment in the USA under passive, random walk, value at risk, and Sharpe ratio strategies.
Design/methodology/approach
To comply with the purpose, this paper used a GARCH model, and used, as basic data, daily C$ exchange rates and weekly US and Canadian interest rates on 90‐day CDs, from January 2 to November 26, 2004.
Findings
The empirical results suggest that currency returns are positively correlated to risk; and that the return provided by the random walk strategy beats the other strategies considered in this paper.
Practical implications
The findings suggest that currency investment is similar to other forms of investment, since it shows a positive relationship between risk and return. It also supports the long‐standing belief that sophisticated strategies do not beat simple‐minded approaches such as a random walk strategy.
Originality/value
This paper uses a utility function to investigate the response of investors to risk and return under different aversion scenarios.
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O. Duangploy, V.H. Bakay and P.A. Belk
This study examines how US multinational enterprises manage foreign exchange risks by exploring the concepts applied by management, the objectives followed, and how management has…
Abstract
This study examines how US multinational enterprises manage foreign exchange risks by exploring the concepts applied by management, the objectives followed, and how management has organised this important function of multinational financial management. Despite the change in generally accepted accounting principles from SFAS8 to SFAS52 and the fact that translation exposure is not real exposure, 19 of the 22 surveyed companies closely monitored accounting exposure and would take action under certain circumstances. Further, transaction exposure management still plays a significant role in foreign exchange risk management. Economic exposure management, which focuses on foreign exchange‐induced changes in future cash flows, was also perceived as essential, although the degree of sophistication varies. The majority of the participating companies are risk averse and have centralised their foreign exchange risk management.
Mehdi Khashei and Bahareh Mahdavi Sharif
The purpose of this paper is to propose a comprehensive version of a hybrid autoregressive integrated moving average (ARIMA), and artificial neural networks (ANNs) in order to…
Abstract
Purpose
The purpose of this paper is to propose a comprehensive version of a hybrid autoregressive integrated moving average (ARIMA), and artificial neural networks (ANNs) in order to yield a more general and more accurate hybrid model for exchange rates forecasting. For this purpose, the Kalman filter technique is used in the proposed model to preprocess and detect the trend of raw data. It is basically done to reduce the existing noise in the underlying data and better modeling, respectively.
Design/methodology/approach
In this paper, ARIMA models are applied to construct a new hybrid model to overcome the above-mentioned limitations of ANNs and to yield a more general and more accurate model than traditional hybrid ARIMA and ANNs models. In our proposed model, a time series is considered as a function of a linear and nonlinear component, so, in the first phase, an ARIMA model is first used to identify and magnify the existing linear structures in data. In the second phase, a multilayer perceptron is used as a nonlinear neural network to model the preprocessed data, in which the existing linear structures are identified and magnified by ARIMA and to predict the future value of time series.
Findings
In this paper, a new Kalman filter based hybrid artificial neural network and ARIMA model are proposed as an alternate forecasting technique to the traditional hybrid ARIMA/ANNs models. In the proposed model, similar to the traditional hybrid ARIMA/ANNs models, the unique strengths of ARIMA and ANN in linear and nonlinear modeling are jointly used, aiming to capture different forms of relationship in the data; especially, in complex problems that have both linear and nonlinear correlation structures. However, there are no aforementioned assumptions in the modeling process of the proposed model. Therefore, in the proposed model, in contrast to the traditional hybrid ARIMA/ANNs, it can be generally guaranteed that the performance of the proposed model will not be worse than either of their components used separately. In addition, empirical results in both weekly and daily exchange rate forecasting indicate that the proposed model can be an effective way to improve forecasting accuracy achieved by traditional hybrid ARIMA/ANNs models.
Originality/value
In the proposed model, in contrast to the traditional hybrid ARIMA/ANNs, it can be guaranteed that the performance of the proposed model will not be worse than either of the components used separately. In addition, empirical results in exchange rate forecasting indicate that the proposed model can be an effective way to improve forecasting accuracy achieved by traditional hybrid ARIMA/ANNs models. Therefore, it can be used as an appropriate alternate model for forecasting in exchange ratemarkets, especially when higher forecasting accuracy is needed.
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Sameer Kumar, Jennifer Medina and Mark T. Nelson
The motivation for this study is triggered by the fact that lately contract manufacturers in China have to deal with a number of unprecedented cost pressures such as currency…
Abstract
Purpose
The motivation for this study is triggered by the fact that lately contract manufacturers in China have to deal with a number of unprecedented cost pressures such as currency fluctuations, the VAT rebate reduction, and minimum wage enforcement. As cost pressures in China continue to mount, this paper aims to analyze whether the US manufacturing outsourcing pendulum is swinging away from China and back to nearby Mexico, or towards emerging low‐cost countries such as Vietnam, Indonesia, South Africa, Turkey or Argentina.
Design/methodology/approach
Analysis consists of comparing major cost drivers such as labor, currency, freight, and raw material and determined per unit price and the potential impact of currency fluctuations over the next five years. An example of Easle Pads (paper‐based non‐adhesive coated) is used to present the detailed analysis.
Findings
The outsourcing landscape today may change again in the near future as the VAT rebate is further reduced or eliminated or the impact of the Olympic Games finish. Assumptions will need to be updated to reflect any changes in the future. Though other countries such as Vietnam appear to be viable options, managers will need to take other factors into consideration when making outsourcing decisions. They will need to identify specific suppliers in a country and obtain quotes in order to finalize their decision.
Research limitations
The data analysis is supposedly very high‐level. Many assumptions were applied lacking full detail, and duties and customs were not specifically addressed for each country. However, this organized approach is useful as a strategic decision tool in performing supplier searches to identify potential countries.
Practical implications
The paper helps shed light on the opportunities that exist in the emerging low‐cost countries such as Vietnam and Indonesia. Other countries, such as Turkey and Argentina, also offer low labor costs, but may be better considered as regional sources of supply, rather than US outsourcing destinations.
Originality/value
The majority of studies on manufacturing outsourcing in relation to China concentrate on the reasons why one should choose China. The paper looks at manufacturing outsourcing away from China and identifies possible alternatives for contract manufacturing.
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