Hedging against foreign exchange risk of peso-dollar rates using futures

Issue Date

8-2014

Abstract

Transactions involving foreign exchange trading are very popular to investors particularly to multinational companies and other large corporations. This kind of transaction includes risk due to great uctuation in currency exchange rates. Thus, this paper used currency futures contract with a maturity of six months to hedge risk resulting from the uctuations on the peso-dollar (Philippine peso - US Dollar) exchange rates. The Cox Ingersoll-Ross (CIR) model was utilized to forecast 182-day Philippine and US Treasury Bill (T-bill) rates for January to June 2012. Maximum Likelihood Estimation (MLE) was applied in estimating the parameters of the CIR model. The computed T-Bills were used to forecast the price of the futures contract. To help the investors de cide in making such transaction, optimal hedge ratio (OHR) was also calculated using the time series model GARCH (1,1).

Source or Periodical Title

Applied Mathematical Sciences

ISSN

1312-885X

Volume

8

Issue

110

Page

5469-5476

Document Type

Article

Physical Description

tables

Language

English

Subject

CIR model, Futures, maximum likelihood estimation, optimal hedge ratio

Identifier

doi:10.12988/ams.2014.47595.

Digital Copy

yes

Link to Full Text

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