Empiria arbejdspapir nr. 4

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Working paper no. 4: Håndtering af valutarisiko
by Mille Schultz-Møller og Malene Dahl Nielsen

Abstract
Currency risk is and will always be and exogenous variable for the company. A high volatility on the currency markets the last couple of years has led to an increased demand for hedging instruments that can be used in order to manage and reduce the concerned risk.
This paper highlights how companies optimally should use forward contracts and currency options to hedge future cashflow in foreign currencies. The empirical analysis is based on the performance of five different hedging strategies: Forward contract, ATM option, OTM option, Risk Reversal and Flexible Forward. The results are based on an empirical back test on six different currencies in the period 1999-2009.
From the empirical analysis the following results can be highlighted: ATM and OTM options have an attractive right skewed performance distribution resulting from limited downside and unlimited upside - despite their high premium payments. The remaining three zero cost strategies show, with their symmetric structure, unlimited negative performances compared to the open position, which is not an attractive feature for the company. Based on the results from the empirical analysis we have created a decision model. The model provides the company with suggestions about the optimal hedging strategy based on the company’s cashflow type, premium payments, the implied volatility and the expected movements in the underlying spot price in the contract tenor. All five strategies are represented in the model and can be used as optimal hedging strategies.

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