CURRENCY HEDGING STRATEGIES USING MULTIVARIATE GARCH MODELS
DOI:
https://doi.org/10.11113/jt.v78.8321Keywords:
Exchange rates, Hedging effectiveness, ASEAN 3 countries, optimal hedge ratio, multivariate GARCH.Abstract
Hedging on futures or forward markets is an important tool to reduce risk. Thus, in order to manage the currency risk, it is important to have a suitable hedging strategy. Hedging is a means to offset potential losses on investment by making the second investment, which is expected to move in the opposite way in the financial markets. Therefore, this study aims to identify the relationship between spot and futures contract exchange rates and spot and forwards contract exchange rates. Secondly, calculate the optimal hedge ratio in order for effective optimal portfolio design and hedging strategy using CCC, DCC and Diagonal-BEKK models. The data consist of daily closing prices of spot, futures and 3-month forwards contract for currencies within ASEAN and ASEAN+3 countries. The empirical results revealed that the best model for hedging effectiveness is found to be CCC and DCC. These two models are able to reduce the variance 59.64 percent for Japanese Yen, 97.42 percent for Malaysia Ringgit, 66.14 percent for Singapore Dollar and 93.42 for Philippine Peso. Hence, it can be suggested to investors to hedge Malaysia Ringgit since the currency has the highest reduction in risk.
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