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.
Exporters optimal and selective hedging choices" (Fabling and Grimes, 2008b); "The Evolution of Export Unit Values: Some stylised facts" (Fabling, Joyce and Sanderson, forthcoming); and "Export Market Choices of New Zealand Firms" (Fabling, Grimes and Sanderson, 2008).
Selective hedging is prevalent across a wide range of firms and economic conditions, but is somewhat more prevalent among firms which rely less heavily on exporting as a share of sales- perhaps reflecting a less developed understanding of exchange rate markets.
Exporters optimal and selective hedging choices, Reserve Bank of New Zealand Discussion Paper DP2008/14.
To compensate for this major drawback, futures hedgers use basis trades and speculate on when is the best time to place the hedge, called selective hedging
. Selective hedging
and basis trading are important concepts in price risk management and will be dealt with in more detail in later chapters as sophisticated risk management strategies are developed.
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)).
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.