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Hedge Effectiveness in the Brazilian US Dollar Futures Market

Author

Listed:
  • Marcelo Cabus Klotzle

    (Pontifícia Universidade Católica do Rio de Janeiro)

  • Antonio Carlos Figueiredo Pinto

    (Pontifícia Universidade Católica do Rio de Janeiro)

  • Mario Domingues Simões
  • Leonardo Lima Gomes

    (Pontifícia Universidade Católica do Rio de Janeiro)

Abstract

In recent years, one could observe a very definite surge in dollar prices in Brazil. Many Brazilian Companies, especially those with large amounts of dollar denominated debt incurred substantial losses due to the strong and fast growth of the dollar. The subsequent dollar price collapse from 2002 to 2008 caused great losses to exporters. In the context of hedge being a form of protection against currency oscillations, this paper aimed to study its effectiveness using the dollar future market in the BM&FBovespa. Specifically, four alternatives for calculating the optimum hedge ratio were compared: a) the so called naïve approach, where opposite positions are taken in the spot and future markets; b) OLS – Ordinary Least Squares c) symmetric bi-variate GARCH (Generalized Autoregressive Conditional Heteroscedasticity); d) asymmetric bi-variate GARCH. The results showed that both GARCH supported hedge ratios presented higher effectiveness when compared to OLS, with in turn surpassed the naïve one.

Suggested Citation

  • Marcelo Cabus Klotzle & Antonio Carlos Figueiredo Pinto & Mario Domingues Simões & Leonardo Lima Gomes, 2011. "Hedge Effectiveness in the Brazilian US Dollar Futures Market," Brazilian Review of Finance, Brazilian Society of Finance, vol. 9(3), pages 365-382.
    • Handle: RePEc:brf:journl:v:9:y:2011:i:3:p:365-382
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    More about this item

    Keywords

    Hegde; US-Dollar Futures Market; Garch Models;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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