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Asymmetric hedging of the corporate terms of trade

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  • Roger Bowden
  • Jennifer Zhu

Abstract

Risk management techniques such as value at risk and conditional value at risk focus attention on protecting the downside exposures without penalizing the upside exposures. The implied welfare functions are equivalent to an otherwise risk neutral agent with a put option exposure on the downside. The correspondence can be exploited to design smoother loss measures and numerically based solutions for optimal hedge ratios. A statistically well‐adapted hedge object for the firm is the corporate terms of trade, which balances up output and expense prices as a single index related to the net profit margin. The methods are applied to the NZ dairy industry to derive optimal foreign exchange forwards based hedges. It is not always optimal to rely solely on forward discounts or premiums. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:1059–1088, 2006

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  • Roger Bowden & Jennifer Zhu, 2006. "Asymmetric hedging of the corporate terms of trade," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 26(11), pages 1059-1088, November.
    • Handle: RePEc:wly:jfutmk:v:26:y:2006:i:11:p:1059-1088
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    Cited by:

    1. Fabrice Nzepang & Saturnin Bertrand Nguenda Anya, 2022. "Effects of ICTs on the Terms of Trade of Sub-Saharan African Economies," Journal of African Trade, Springer, vol. 9(1), pages 107-119, December.

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