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The Research On Hedge Technologies And Their Application In Exchange Rate Risk Management

Posted on:2005-07-24Degree:DoctorType:Dissertation
Country:ChinaCandidate:X WuFull Text:PDF
GTID:1116360125958909Subject:Management Science and Engineering
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The world's economic and financial environment has evolved profoundly since the 1970's. After China's reform and opening her domestic financial markets gradually go in line with the international practice. This trend of market inosculation accelerates after China's entrance of the WTO, accompanied with an increment of international financial risks, especially of the exchange rate risk. But the persistent so-called "super-stable" state of the RMB exchange rates recent years results in the lack of sense of management and subsequently, lack of effective mitigation of exchange rate risks. This is the background of this research on hedge technologies and their application in exchange rate risk management, and is also its very significance in theory and practice alike.Methods of exchange rate risk management could be divided into two categories according to the utilization of derivatives. One is the traditional method that does not use derivatives, and the other is the opposite. Comparatively, the former has been thoroughly investigated theoretically, and is usually adopted in exchange rate risk management in China, though the management practice itself is rare; the latter has been becoming the focus of researchers because of its performance in risk control. Managing exchange rate risks with derivatives is now often labeled hedging, though in a narrower sense hedging only refers to a round-trip of derivative transaction and in a broader sense, the synonym of financial risk management.The ultimate object of the dissertation is to furnish the parties concerned with practical and effective strategies of exchange rate risk management. Arguing that the determination of the optimal hedge ratios (OHRs) is the central issue of modern hedge researches, the dissertation firstly compares between and comments on the hedge literature, reviews the history of hedge theories, sorts out and analyzes various methodologies of OHRs, extends one important theoretical method - the Adler-Dumas Approach, and introduces possible future extension directions in this field. Then aimed to settle the somewhat diversified and fragmentary currency hedge studies, it establishes a theoretical framework exemplified on an exporting firm for researches on hedging exchange rate risks, with the maximization of expected utility as the framework rationale. The framework investigates the impact of different hedge strategies on the operation of the firm with given functions of costs and utility and conditions of available derivative markets. Next, based on the framework rationale it presents in-depth analyses on several outstanding issues of currency hedging, including themrelation between exporters and exchange rate volatility, the pricing behavior of an exporting firm with hedging opportunities, and the choice between derivatives when hedging exchange rate risks, etc., and reaches valuable conclusions along with the proven framework applicability. Finally in the empirical part it chooses to investigate the hedging effectiveness of various OHRs computed by different models under direct and cross hedging circumstances, applying actual exchange rates and currency futures data.It concludes that under the existing international economic and financial environment, the parties concerned could effectively reduce their exchange rate risks with derivative hedging. Even hi developing economies such as China where the derivative markets are embryonic, they are supposed to dramatically drive down their currency risk exposure via cross hedging. The results of empirical investigation back up this conclusion. Maybe the most meaningful implication is that under the current exchange rate regime of China, with RMB rates peg to the US Dollar, which has the most developed currency derivative markets, China parties' cross hedging their exposures to currencies other than the US Dollar with US Dollar derivatives will have almost the same effects as their US counterparts' direct hedging. Furthermore, they could begin with the traditional hedging models and techniques, switch...
Keywords/Search Tags:risk management, exchange rate risk, hedging, derivatives
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