Long Term Exchange Rate Risk And Hedging With Quantity Uncertainty In A Market That Only Provides Short Term Futures Contracts

Long Term Exchange Rate Risk And Hedging With Quantity Uncertainty In A Market That Only Provides Short Term Futures Contracts

This paper analyzes the problem faced by an investor expecting to receive an uncertain amount of cash flow in a foreign currency on a certain future date T. The investor is also assumed to be exposed to long-term exchange rate risk, and has access only to short-term futures contracts to hedge. A clo...

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Bibliographic Details
Published in:Academia (Consejo Latinoamericano de Escuelas de Administración) 2012-01, Vol.50 (50), p.66-78
Main Authors: Castillo, Augusto, Aguila, Rafael, Niño, Jorge
Format: Article
Language:por ; eng
Subjects:
Cash flow
Exchange rates
Expected utility
Foreign exchange rates
Futures
Hedging
Interest rates
Investment policy
Investors
Prices
Risk management
Stochastic models
Studies
Uncertainty
Utility functions
Volatility
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Summary:This paper analyzes the problem faced by an investor expecting to receive an uncertain amount of cash flow in a foreign currency on a certain future date T. The investor is also assumed to be exposed to long-term exchange rate risk, and has access only to short-term futures contracts to hedge. A closed form solution for both the optimal hedging strategy and the quality of the hedging are identified. Next, we explored how those solutions depend on some key factors such as the volatility of the exchange rate, the volatility of the amount of foreign currency to be received and the degree of correlation between all the stochastic variables considered. [PUBLICATION ABSTRACT]
ISSN:1012-8255
2056-5127