CURRENCY RISK HEDGING DURING THE FINANCIAL CRISIS: A CASE STUDY

This study tries to identify if the financial risk of foreign exchange exposure is neutralized or not for any given importer hedging an average of euro 100,000 per month with forward contracts. The exploration is based on the case study methodology triangulated with primary data collection and secondary data analysis of the exchange rates for forward contracts rates versus actual spot rates given by a Cypriot Bank for EURO versus USD, GBP and JPY. The hypothetical question is tested by the Sharpe ratio and regards only the hedge or not hedge situation, out of the possible combinations, disregarding intermediary choices or transaction and translation costs. We have looked at the overall, but also annual results of the total hedging versus the total non-hedging strategies for the period of the financial crisis (March 2007-February 2010) and analysed the forward rates under the ‘unbiased predictor’ preconception. Our results show that always hedging is preferable to remaining un-hedged for the Cypriot importer for JPY exposures, remaining un-hedged is a better solution to GBP currency exposures, while the decision to hedge or not to hedge against the USD depends on the firm’s perspective of data analysis and especially cash flow changes. Subsequently, we found dependency on non-hedging more to the currency depreciation, the reduction of the risk free rates, the volatility of the FWD and actual future Spot prices in the market, as well as longer time periods.