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Currency risk management: simulating the Canadian dollar

Author

Listed:
  • Francisco Carrada‐Bravo
  • Hassan K. Hosseini
  • Lorenzo Fernandez

Abstract

Purpose - The purpose of this article is to investigate the return associated with a Canadian dollar (C$) investment in the USA under passive, random walk, value at risk, and Sharpe ratio strategies. Design/methodology/approach - To comply with the purpose, this paper used a GARCH model, and used, as basic data, daily C$ exchange rates and weekly US and Canadian interest rates on 90‐day CDs, from January 2 to November 26, 2004. Findings - The empirical results suggest that currency returns are positively correlated to risk; and that the return provided by the random walk strategy beats the other strategies considered in this paper. Practical implications - The findings suggest that currency investment is similar to other forms of investment, since it shows a positive relationship between risk and return. It also supports the long‐standing belief that sophisticated strategies do not beat simple‐minded approaches such as a random walk strategy. Originality/value - This paper uses a utility function to investigate the response of investors to risk and return under different aversion scenarios.

Suggested Citation

  • Francisco Carrada‐Bravo & Hassan K. Hosseini & Lorenzo Fernandez, 2006. "Currency risk management: simulating the Canadian dollar," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 2(1), pages 77-90, January.
    • Handle: RePEc:eme:ijmfpp:17439130610646171
    DOI: 10.1108/17439130610646171
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