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Limiting Foreign Exchange Exposure through Hedging: The Australian Experience

Author

Listed:
  • Chris Becker

    (Reserve Bank of Australia)

  • Daniel Fabbro

    (Reserve Bank of Australia)

Abstract

The Australian economy has proven resilient to sizable exchange rate fluctuations over the post-float period. In part this can be attributed to financial institutions and non-financial firms learning to adapt to swings in the Australian dollar. This has included the increased use of financial derivative contracts to hedge their foreign exchange exposures. This paper examines the available evidence on the nature and extent of this hedging behaviour. Related to this, Australia’s net foreign liability position is often cited as a vulnerability of the Australian economy to exchange rate depreciation. We show this not to be the case because much of the liability position is denominated in local currency terms. In fact, the amount of liabilities denominated in foreign currency is less than the amount of foreign currency assets held by residents.

Suggested Citation

  • Chris Becker & Daniel Fabbro, 2006. "Limiting Foreign Exchange Exposure through Hedging: The Australian Experience," RBA Research Discussion Papers rdp2006-09, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp2006-09
    as

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    References listed on IDEAS

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    Cited by:

    1. Philip R. Lane & Jay C. Shambaugh, 2010. "Financial Exchange Rates and International Currency Exposures," American Economic Review, American Economic Association, vol. 100(1), pages 518-540, March.
    2. Kyoungsoo Yoon, 2013. "FX Funding Risks and Exchange Rate Volatility - Korea's Case," 2013 Meeting Papers 1361, Society for Economic Dynamics.
    3. Bénétrix, Agustin S. & Lane, Philip R. & Shambaugh, Jay C., 2015. "International currency exposures, valuation effects and the global financial crisis," Journal of International Economics, Elsevier, vol. 96(S1), pages 98-109.
    4. Benedetta Bianchi & Giovanna Bua, 2020. "Foreign exchange derivatives and currency mismatch in Irish investment funds," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Bridging measurement challenges and analytical needs of external statistics: evolution or revolution?, volume 52, Bank for International Settlements.
    5. Alexander Ballantyne & Jonathan Hambur & Ivan Roberts & Michelle Wright, 2014. "Financial Reform in Australia and China," RBA Research Discussion Papers rdp2014-10, Reserve Bank of Australia.
    6. McCauley, Robert N., 2015. "Does the US dollar confer an exorbitant privilege?," Journal of International Money and Finance, Elsevier, vol. 57(C), pages 1-14.
    7. Katalin Bodnár, 2009. "Exchange rate exposure of Hungarian enterprises – results of a survey," MNB Occasional Papers 2009/80, Magyar Nemzeti Bank (Central Bank of Hungary).
    8. Clements, Kenneth & Lan, Yihui & Roberts, John, 2008. "Exchange-rate economics for the resources sector," Resources Policy, Elsevier, vol. 33(2), pages 102-117, June.

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    More about this item

    Keywords

    hedging; foreign currency exposure; derivatives;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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