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Effective Cross-Hedging for Commodity Currencies


  • Chakriya Bowman


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.

Suggested Citation

  • Chakriya Bowman, 2005. "Effective Cross-Hedging for Commodity Currencies," International and Development Economics Working Papers idec05-6, International and Development Economics.
  • Handle: RePEc:idc:wpaper:idec05-6

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    References listed on IDEAS

    1. Raj Aggarwal & Andrea L. Demaskey, 1997. "Using derivatives in major currencies for cross‐hedging currency risks in Asian emergency markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 17(7), pages 781-796, October.
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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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