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Effective Cross-Hedging for Commodity Currencies

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  • Chakriya Bowman

Abstract

There has been little evidence in the past to support the use of commodity-currency cross-hedges (Demaskey and Pearce, 1998; Benet, 1990; Eaker and Grant, 1987). However, this paper shows that if currencies can be defined as commodity currencies, as per Chen and Rogoff (2003) and Cashin, Ce´spedes and Sahay (2004), commodity-currency cross-hedges are effective and beneficial. Two commodity currencies, the Papua New Guinea kina and the Australian dollar, are shown here to be effectively hedged by commodity futures. Multiple commodity hedges generally improved performance, with four-commodity basket hedges effective for both currencies.

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File URL: https://crawford.anu.edu.au/degrees/idec/working_papers/IDEC05-6.pdf
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Bibliographic Info

Paper provided by International and Development Economics in its series International and Development Economics Working Papers with number idec05-6.

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Length: 32 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:idc:wpaper:idec05-6

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