Posted: 15 Aug 2009
Date Written: August 13, 2009
A survey on derivative usage and financial risk management in New Zealand shows that the currency forward is the most frequently used derivatives in hedging transaction exposure. This paper examines whether forwards performs better than over-the-counter option for a New Zealand exporter in hedging NZD/USD transaction exposure. This research adopts Hsin, Kuo and Lee’s (1994) model of hedging effectiveness which maximizes the exporter’s expected negative exponential utility function to compare and evaluate the ex-ante hedging effectiveness of both forwards and options synthetic forwards. The results show that prior to the 1997 Asian Crisis, forwards are marginally more effective than options synthetic forwards for an ordinary risk-averse exporter to hedge against her/his 1, 3, 6 and 12-month transaction exposures. However, during and after the 1997 Asian Crisis, options synthetic forwards are more effective than forwards for hedging exposures of 1, 3 and 6 months. The results are robust to the exporter’s degree of absolute risk aversion.
Keywords: Forwards, hedging effectiveness, optimal hedge ratio, options synthetic forwards, utility maximization
JEL Classification: G1, G11
Suggested Citation: Suggested Citation
Chan, Kam Fong and Gan, Christopher and McGraw, Patricia A., A Hedging Strategy for New Zealand’S Exporters in Transaction Exposure to Currency Risk (August 13, 2009). Multinational Finance Journal, Vol. 7, No. 1 & 2, 2003. Available at SSRN: https://ssrn.com/abstract=1448547