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1 – 10 of over 3000Corporate treasurers, in managing their foreign currency payables and receivables, are continually forced to decide whether to deal forward or to wait and to deal spot in the…
Abstract
Corporate treasurers, in managing their foreign currency payables and receivables, are continually forced to decide whether to deal forward or to wait and to deal spot in the future. The forward market provides a market where, for a price, the risk of adverse foreign exchange rate fluctuations can be sold off to professional risk bearers. The last ten years have seen considerable turmoil in the foreign exchange markets. In this article I want to examine several issues. Firstly, how do you measure the cost of forward cover under flexible rates and has there been any change in the cost of cover of flexible compared with fixed rates? Secondly, to what extent is the forward market a reliable forecaster of future spot rates? Thirdly, what, if any, are the corporate hedging implications of the behaviour of the forward market?
The national objectives of forward exchange controls are to restrain speculation in foreign exchange, to limit international capital flows and to affect the forward exchange rates…
Abstract
The national objectives of forward exchange controls are to restrain speculation in foreign exchange, to limit international capital flows and to affect the forward exchange rates. Restrictions on forward transactions are economic welfare costs for enterprises and banks, which are analysed in terms of risk‐return and supply‐demand theory. Empirical answers to whether forward exchange control is really necessary await collection and disclosure of company currency exposure, which itself may contribute to the national objectives implicit in forward exchange controls.
It is widely recognized that expectations of future events have significant impact on exchange rates movements. The role of expectations in exchange rate movements can be…
Abstract
It is widely recognized that expectations of future events have significant impact on exchange rates movements. The role of expectations in exchange rate movements can be considered as a source of exchange rate estimation error. In a sense it is a pity that the majority of empirical evidence on the exchange rate fluctuation clearly negates the validity of such models that are more sophisticated and comprehensive.
This paper analyzes the information content of the forward exchange rates implied by the interest rate parity, using the Korea and U.S. interest rates and Won/dollar exchange rates…
Abstract
This paper analyzes the information content of the forward exchange rates implied by the interest rate parity, using the Korea and U.S. interest rates and Won/dollar exchange rates observed during the period of March 1991 to December 2002. First, we test the cointegration between implied forward exchange rates and future spot exchange rates to examine their longrun relationship, and find the existence of cointegration. Next, we examine the international Fisher effect and estimate an error correction model for their shortrun relationship. Our analysis supports the international Fisher effect for longer maturities. Our result also supports the error correction model that states that the future spot exchange rates will be adjusted reflecting the information contained in the past-period implied forward rates which is not fully reflected to current spot rates. Finally, we also find that the term structure of implied forward exchange rates is associated with the changes in future spot rates for longer maturities. Based on our findings, we conclude that the longrun relationship exists between the implied forward exchange rates and future spot exchange rates, and the shortrun deviation from the relationship tend to disappear as they return to the longrun relationship in the course of time.
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Following Clarida and Taylor, the term structure of forward exchange premiums can be interpreted as multiple cointegration vectors, if it is assumed that departures from the…
Abstract
Following Clarida and Taylor, the term structure of forward exchange premiums can be interpreted as multiple cointegration vectors, if it is assumed that departures from the risk‐neutral efficient markets hypothesis are stationary. This hypothesis is tested using spot rates and one‐month and three‐month forward rates for six European countries during the 1920s floating rate era. Beginning in late 1924, speculation about a return to gold may have resulted in a non‐stationary forward premium. However, except for this speculative period, the term structure of forward premiums was stationary for three currencies. Thus the empirical results presented are broadly consistent with the analysis of Taylor and McMahon, MacDonald and Taylor and Miller and Sutherland.
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Whereas the last decade has seen remarkable growth in United States (US) futures business, in the United Kingdom (UK) the volume in some sectors has been disappointing. Although…
Abstract
Whereas the last decade has seen remarkable growth in United States (US) futures business, in the United Kingdom (UK) the volume in some sectors has been disappointing. Although new markets are continuing to appear (such as the Baltic International Freight Futures Exchange, BIFFEX, which opened for business in May 1985), on 31 January 1985 the London Gold Futures Market (LGFM) announced its intention to close and from time to time there has been speculation that LIFFE, the London International Financial Futures Exchange, may not be able to continue in its present form because of lack of business (although the range of traded instruments continues to expand). Some factors that would tend to discourage business are:
Since the widespread introduction of floating exchange rate regimes amongst the major currencies in the early 1970s, the problem of correctly anticipating exchange rate…
Abstract
Since the widespread introduction of floating exchange rate regimes amongst the major currencies in the early 1970s, the problem of correctly anticipating exchange rate fluctuations is one that corporate treasurers of companies having any international dealings have had to face in order to manage successfully the exchange risk inherent in international contracts.
Zsuzsa R. Huszár, Ruth S. K. Tan and Weina Zhang
This study seeks to explore the presence and the relative strength of market efficiency in the onshore and offshore Renminbi (RMB) forward markets.
Abstract
Purpose
This study seeks to explore the presence and the relative strength of market efficiency in the onshore and offshore Renminbi (RMB) forward markets.
Methodology/approach
In the onshore and offshore foreign exchange markets, the RMB forward contracts are designed in similar ways. However, the underlying economic forces and regulatory frameworks are very different in these two markets. We first analyze the functioning of each market, by examining the covered interest rate parity (CIRP) conditions. Second, we explore the CIRP deviations in the two markets and quantify the role of market frictions and government interventions.
Findings
We find that the CIRP condition does not hold in either the onshore or the offshore RMB forward markets. We also find that the offshore market is more efficient than the onshore market in conveying private information about investors’ expectation.
Originality/value
Our results reveal that the onshore RMB forward market provides an imperfect platform for investors to manage their currency exposures. We suggest that by opening the offshore market to domestic participants and the onshore market to more foreigners, the forward rates may become more informative with a greater investor mix. These liberalization efforts are important steps in the right directions to improve market efficiency in the Chinese FOREX market.
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Gunter Dufey and David P. Walker
This essay analyses alternative strategies for a firm to deal with exchange risk. “Profit maximising” and “risk minimising” strategies are examined as extreme alternatives. The…
Abstract
This essay analyses alternative strategies for a firm to deal with exchange risk. “Profit maximising” and “risk minimising” strategies are examined as extreme alternatives. The former requires successful exchange rate forecasting, the latter is based on avoiding any impact of unexpected exchange rate changes on the firm. This strategy is illustrated using three “typical” firms as examples: the occasional exporter, the permanent exporter/or importer, and a firm with multi‐national operations. In each case, operational aspects are carefully identified and conclusions are drawn as to the necessary structuring of the firms' liabilities.
This chapter aims to find an optimal way to hedge foreign exchange exposures on three main currency pairs being the EURUSD, EURGBP and EURJPY. Furthermore, it analyses the risk…
Abstract
Purpose
This chapter aims to find an optimal way to hedge foreign exchange exposures on three main currency pairs being the EURUSD, EURGBP and EURJPY. Furthermore, it analyses the risk level of each portfolio together with its kurtosis level. This chapter also looks into the relationship between the EURUSD portfolios and the VIX level.
Methodology/approach
This study is based on a back-testing analysis over a period of seven years starting in January 2007 and ending in December 2014. Two main Foreign Exchange Premium-Free strategies were structured using the Bloomberg Terminal. These were the ‘At-Expiry Forward Extra’ and the ‘Window Forward Extra’. Portfolios were created using FX options strategies, FX spot and FX forwards. The EURUSD portfolios were also analysed and compared with the VIX level in order to see whether volatility has a direct effect on the outcome of the strategies. The statistical significance of the difference between returns of portfolios was analysed using a paired sample t-test. Finally, the histogram and distribution curve of each portfolio were created and plotted in order to provide a more visual analysis of returns.
Findings
It was found that the optimal strategies in all cases were the FX option strategies. The portfolios’ risk was analysed and indicated that optimal portfolios do not necessarily derive the lowest risk. It was also found that with a high VIX level, the forward contract was the most beneficial whilst the option strategy benefited from a low VIX level. When testing for statistical significance between returns of different portfolios, in most cases, the difference in returns between portfolios resulted to be statistically insignificant. Although some similarities were noticed in distribution curves, these differed from the normal distribution. When analysing the kurtosis levels, it is found that such levels differed from that of a normal distribution which has a kurtosis level of 3. Interpretation of such histograms, distribution curves and the kurtosis analysis was explained.
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