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A Hedging Strategy for New Zealand’S Exporters in Transaction Exposure to Currency Risk

Posted: 15 Aug 2009  

Kam Fong Chan

University of Queensland - Faculty of Business, Economics and Law; Financial Research Network (FIRN)

Christopher Gan

Lincoln University (NZ)

Patricia A. McGraw

Ryerson University

Date Written: August 13, 2009

Abstract

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

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

Kam Fong Chan (Contact Author)

University of Queensland - Faculty of Business, Economics and Law ( email )

4072 Brisbane, Queensland
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Christopher Gan

Lincoln University (NZ) ( email )

PO Box 85084
Ellesmere Junction Road/Springs Road
Lincoln, 7647
New Zealand

Patricia A. McGraw

Ryerson University ( email )

Ryerson University, 350 Victoria Street, Toronto
Toronto, Ontario M5B 2K3
Canada

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