Recently, our financial institutions and firms have undergone insolvency and bankruptcy. This crisis mainly results from serious lacking in dollar liquidity. As a necessary consequence, foreign exchange rates sharply rise and financial institutions are more concerned about hedging foreign exchange risk.
This study aims to present the cross-hedging for the Korean Won in the foreign currency futures markets as a risk management tools. It focuses on the optimal hedge ratio and effectiveness of the cross-hedging using the currency futures contracts and inter-temporal stability test. The hedge estimates are measured from the portfolio hedging model.
From the perspective of a hedger, the chances of success for cross-hedging are i) What degree of hedging effectiveness can be expected from the currency futures market ii) Are the optimal hedge ratios stable over time.