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Risk Transfer Arrangements as a Hedging Device with Evidence from the Kuwaiti Dinar-British Pound Market

Listed author(s):
  • Moosa Imad

    (Royal Melbourne Institute of Technology)

Registered author(s):

    An operational hedging technique is proposed to shift some of the foreign exchange risk from the importer to the exporter when the currency of invoicing is the base currency of the exporter. This technique, which may be resorted to when financial hedging is not feasible or expensive, requires an arrangement for the conversion of cash flows at a range of exchange rates calculated as some weighted average of the rates used under a risk sharing arrangement and a currency collar. The problem of negotiating the dimensions of the arrangement when the exporter and importer have different degrees of risk tolerance can be resolved by fine tuning the weights in such a way as to eliminate the sensitivity of the base currency value of the cash flow to the value of the risk sharing threshold parameter. The theory is subsequently illustrated by using monthly observations on the exchange rate between the Kuwaiti dinar and the British pound.

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    Article provided by De Gruyter in its journal Review of Middle East Economics and Finance.

    Volume (Year): 7 (2011)
    Issue (Month): 2 (September)
    Pages: 1-18

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    Handle: RePEc:bpj:rmeecf:v:7:y:2011:i:2:n:3
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    1. Moosa, Imad A. & McDonald, Brien, 2005. "Operational Hedging as an Alternative to Financial Hedging in the Absence of Sophisticated Financial Markets," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 58(2), pages 241-254.
    2. Chang, Eric C. & Wong, Kit Pong, 2003. "Cross-Hedging with Currency Options and Futures," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(03), pages 555-574, September.
    3. Broll, Udo & Wahl, Jack E., 1998. "Missing risk sharing markets and the benefits of cross-hedging in developing countries," Journal of Development Economics, Elsevier, vol. 55(1), pages 43-56, February.
    4. Dick Davies & Christian Eckberg & Andrew Marshall, 2006. "The determinants of Norwegian exporters' foreign exchange risk management," The European Journal of Finance, Taylor & Francis Journals, vol. 12(3), pages 217-240.
    5. Joshua Abor, 2005. "Managing foreign exchange risk among Ghanaian firms," Journal of Risk Finance, Emerald Group Publishing, vol. 6(4), pages 306-318, August.
    6. Lien, Donald & Moosa, Imad, 2004. "A bargaining approach to currency collars," Research in International Business and Finance, Elsevier, vol. 18(3), pages 229-236, September.
    7. George Allayannis & Jane Ihrig & James P. Weston, 2001. "Exchange-Rate Hedging: Financial versus Operational Strategies," American Economic Review, American Economic Association, vol. 91(2), pages 391-395, May.
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