An alternative hedging instrument for minor currencies: The multiple futures contract hedge

In a world of trade among nations using different currencies, accompanying each transaction of goods or services is a parallel currency transaction. The value of one nation's currency relative to another's changes every day in the absence of fixed exchange rates. Economic actors use hedging instruments to reduce or eliminate the risk posed by foreign currency fluctuations.; When a nation's currency hedging instrument (e.g. a currency futures contract) is traded in liquid markets, it is easy to hedge the risk posed by holding a foreign currency position. In these market situations, currency futures contracts can be purchased for hedging the currency position.; However, when a nation's currency hedging instrument is not traded in liquid markets, it is impossible to hedge the risk by the direct hedging. Hence, a proxy for the currencies of small economies (i.e. minor currencies) must be found. This study examines five nations' currencies, the Fiji Dollar, Cyprus Pound, Maltese Lira, Taiwanese Dollar, and South Korea Won in order to determine an effective currency futures hedge for the three minor currencies in the above list: the Fiji Dollar, the Cyprus Pound, and the Maltese Lira.; The results of this study's tests indicate that the multiple futures contract hedge proposed in this study is an appropriate hedging tool for both the Fiji Dollar and the Cyprus Pound. In the case of the Maltese Lira, the results are less conclusive and suggest that the selection of the appropriate futures contracts should be improved.