Research article

OPTIMAL HEDGING STRATEGIES USING CURRENCY FUTURES AND OPTIONS

Dr. Laxman B. Doiphode , Dr. Kanchan Jatkar,

Online First: December 13, 2022


Currency hedging plays a vital role in mitigating the currency risk exposure of multinational companies. The growing magnitude of world trade has increased the foreign exchange risk. Currency risks are effectively managed through currency swaps, multi-currency diversification, and hedging via forwards, futures, and options. This empirical study aims to identify how effective are these hedging instruments to minimise the currency exposure risk involved in cross border trade. Six major currency pairs are investigated to determine the windfall due to deviation in currency spot and futures prices. Currency derivative contract of futures and options were sourced from the NSE website for this research., The effectiveness of hedging is examined through variance analysis and descriptive statistics, measuring the risk-return of the windfall during foreign currency transactions. One-way ANOVA has been used to identify an ideal hedge ratio using a blend of hedging instruments. The findings reveal that the windfall is more favourable for the company when the hedge ratio is 25% after examining the various mix of hedging strategies.

Keywords

Currency Derivatives, Currency Hedging, Foreign Exchange Risk