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We also investigate whether firms that engage in so-called selective hedging are more likely to be affected by fair value reporting.
The fund will draw upon local knowledge through its existing relations and use portfolio construction tools and some selective hedging to manage risks.
This hedging requires selective hedging of exposures whenever forward rates are attractive but keeping exposures open whenever they are not successful pursuit of this strategy requires quantification of expectation about the future and the rewards would depend upon the accuracy of the prediction.
Some corporations, as a matter of policy, forgo hedging altogether, often with the explanation that the kind of selective hedging Dow uses is only a hair-breadth removed from speculation.
Under the selective hedging strategy, the exporter sells the foreign currency forward if the current spot rate is less than or equal to the forward rate (Equation (3a)) and does not hedge if the current spot rate exceeds the forward rate (Equation (3b)).
The forward-rate adjusted returns associated with the selective hedging strategy, |Mathematical Expression Omitted~, are stated as
Empirical support for use of the selective hedging strategy is provided in the studies by Alexander and Thomas |1~, Chiang |6~, and Meese and Rogoff |24~, |25~, |26~.
Using the selective hedging strategy, the exporter hedges 84% to 95% of the time for the German mark, Swiss franc, and Japanese yen, reflecting the fact that during the sample period these currencies were generally selling at a forward premium.
In summary, the stochastic dominance comparisons in Exhibit 2 for the one-month and three-month horizons indicate that the selective hedging strategy generally dominates the unhedged strategy and is efficient relative to the risk-free hedged strategy.
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