Title: To hedge or not to hedge during the financial crisis: a case study

Authors: Simona Mihai-Yiannaki

Addresses: Department of Accounting, Economics and Finance, European University Cyprus (EUC), P.O. Box 22006, 6 Diogenes Street, Engomi, 1516, Nicosia, Cyprus

Abstract: Based mainly on secondary research analysis this case study tracks down foreign exchange risk as exposure during the recent financial crisis (March 2007 to February 2010). The author picked up a value of €100,000 traded by a Cypriot SME importer with a local bank on a monthly basis under either a forward contract or a spot transaction against other three hard currencies. Methodologically, the research uses Sharpe ratio as proxy for either hedge or non-hedge options, ignoring any intermediary hedging alternatives and transaction costs. Then, the hedging strategy proves it backs up the 'unbiased predictor' preconception and then validates it against a weak and a semi-strong efficient market hypothesis theory. Also, I found a 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.

Keywords: currency risk; derivatives; efficient market hypothesis; EMH; foreign exchange risk; foreign exchange exposure; financial crisis; hedging; unbiased predictor; Cyprus; small and medium-sized enterprises; SMEs imports; forward contracts; spot transactions; spot prices; currency depreciation; volatility.

DOI: 10.1504/GBER.2013.053070

Global Business and Economics Review, 2013 Vol.15 No.2/3, pp.210 - 232

Published online: 30 Oct 2013 *

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