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Analysis of Global Foreign Exchange Hedging Behavior

  Reserve Currencies forex cashback easy Sw cashbackforexpips Francs 100%cashbackforex more popular when the world economy is at risk and stock markets are fall cashbackforexg  Why Hedge Foreign Exchange  The reasons why investors hold foreign cashback forex can be intuitively divided into two categories: one is to meet the demand for risk management; the other is to meet the demand for speculation  Because of the high volatility of foreign exchange, and in the absence of adding Leverage is not considerable returns, investors generally do not directly hold foreign exchange, more is indirectly held foreign exchange by investing in other countries assets such as stocks or bonds  In the case of indirectly held foreign exchange, the investors return contains two parts: one is the excess return obtained by investing in other countries assets, the second is the return generated by the appreciation or depreciation of foreign exchange when investing in other countries assets, investors who For example, holding an unhedged foreign stock is equivalent to holding a long foreign exchange position of the same value as the stock position. On the contrary, a fully hedged position is equivalent to a zero foreign exchange position. In fact, the demand for foreign exchange forexcashbackeasy has a richer extension, which includes the demand for foreign exchange hedging arising from investing in domestic nominal investment varieties Investing in domestic nominal investment varieties also requires foreign exchange hedging because, from the The real return perspective, in the case of uncertain inflation trends, no one nominal investment varieties is risk-free in the short term, this hedging needs in developed countries is not too big, but in emerging market countries and other countries with unstable inflation levels, foreign exchange hedging is very necessary in the long run, foreign exchange hedging becomes more necessary  reserve currency exchange rates and global stock market movements are negatively correlated  nbsp; other countries are very rich types of assets, the most important of which are securitized varieties of stocks, bonds, etc. At the same time there are some transactions are not so convenient objects, such as real estate and real estate enterprises, etc. In order to examine the convenience, we will aim at stock investment The reason for this is that stocks as an investment target, with a more obvious pro-cyclicality, its price movements can better reflect The economic situation in addition, stock prices can be more complete and convenient to obtain  investment in other countries stocks and the choice of foreign exchange hedging strategy, the first need to clarify the relationship between various currencies and the stock market According to the research results of Campbell et al. in 2010, the relationship between the selected seven currencies and the stock market lined up, one end is the Australian dollar and the Canadian dollar, which are positively correlated with the stock market The other end is the euro and the Swiss franc, which are negatively correlated with the stock market; in the middle are the British pound, the Japanese yen and the US dollar, where the British pound and the Japanese yen are closer to the Australian dollar and the Canadian dollar, and the US dollar is closer to the euro and the Swiss franc  A typical example of the above characteristics is the decline in the Dow Jones from July 2007 to March 2009 from 13649.97 points to 6763.29 points in the process, the Australian dollar, Canadian dollar and British pound three currencies against the dollar from 1.163, 1.05 and 0.4962, respectively, to 1.583, 1.3012 and 0.7259 during this period, the three currencies depreciated against the dollar by 36.11%, 23.92% and 46.29% during the same period, the Swiss franc and the euro against the dollar either appreciated or depreciated slightly, with a change of less than 10%; while the Japanese yen fell from 123.41 to 98.85 against the dollar, with an appreciation of 19.90%  The reason for the anomalous trend of the yen exchange rate in the above period is that its return to a safe asset orientation as a financing currency in interest-hedging transactions, in a period of economic downturn and weakened global risk tolerance, made arbitrage trading positions significantly lower, which in turn drives the yens appreciation arbitrage trading positions significantly lower, meaning a large number of short positions in the yen to close, which will prompt the yen to rise  ignore the abnormal performance of the yen, the performance of the above currency exchange rates, with the corresponding country or region in the economic characteristics  the dollar, the euro is the typical reserve currency IMFs latest COFER data show In the fourth quarter of 2013, the U.S. dollar and the euro in foreign exchange reserves accounted for 61.2% and 24.4%, respectively, the size of the top two When the global economy is at risk, the stock market decline, the market demand for major reserve currencies will be more robust, so such currency exchange rate movements and global stock markets show a negative correlation  Swiss franc due to its special financial role shows similar characteristics to the U.S. dollar and the euro while Australia and Canada are typically resource-dependent economies, and because commodity price movements are as clearly pro-cyclical as the stock market, the movements of the currencies of these two economies are positively correlated with the global economic situation, i.e., stock market movements  Because of the different correlations between the above currencies and the global economic cycle, investors are investing in different countries The hedging strategies used when investing in the assets of different countries can also differ When an investor buys the stocks of the above countries, the degree of hedging can be as follows: first, over-hedging, if he holds equity assets of other countries worth $1, hedging contracts worth more than $1; second, full hedging, that is, using contracts worth $1 to hedge; third, incomplete hedging, that is, using contracts worth less than $1 U.S. dollar contracts for hedging  Take a U.S. investor, for example, when it invests in stocks of eurozone countries and Switzerland, it tends to choose incomplete hedging that is, holding exposure to the euro and the Swiss franc because the currencies of eurozone countries and Switzerland are negatively correlated with the stock market, and the degree of negative correlation is higher than that between the dollar and the stock market, when the stock market falls, the euro and the Swiss franc tend to appreciate. Investors are willing to hold certain long positions in the euro and the Swiss franc  and if the investor has invested in the stocks of Australia, Canada, the United Kingdom and Japan, respectively, tend to over-hedge Since the currencies of the above countries are positively correlated with the stock market, when the stock market falls, the currencies of the above countries also show depreciation, and holding short positions in the above currencies in excess of the value of the stocks has a positive impact on the overall return  nbsp; In 2010, Compbell et al. used data from 19752005 to test the above logic to U.S. investors investing in stocks of six other markets, for example, their hedging behavior is shown in Figure 4: investing in stocks of Eurozone countries and Switzerland, choosing not to fully hedge, holding long orders equal to 52% and 43% of the currency corresponding to the value of the stock, respectively; investing in Australia and Canada, they will hold short orders equal to 29% and 96% of the currency corresponding to the value of the stock The data for Japan and the United Kingdom defy the above logic, but since the statistical results for Japan are not statistically significant and the statistical results for the United Kingdom are only statistically significant at the 10% level, ignore  whether interest rate differentials affect hedging behavior  we know that different interest rate spreads exist between different currencies, so can hedging transactions between different currencies be profitable? According to the UncoveredInterestRateParity (UIP), in the case of abundant capital and sufficient international mobility, hedging does not lead to excess returns, because the gains generated by the spreads are offset by the depreciation of the higher interest rate currency. However, in reality, high interest rate currencies do not necessarily depreciate, but may show some degree of appreciation. This deviation from the UIP theory is known as the Forward Premium Puzzle (FPP)  since the escalation of high interest rate currencies due to carry is not quickly corrected, the existence of the FPP makes it possible to profit from carry trades. Of course, exchange rate escalation does not last forever, and there are some risky features of carry trades Frahi and Gabaix suggested in 2008 that currencies with high interest rates are exposed to economic crisis risk, while Lustig and Verdelhan found in 2007 that high interest rate currencies are more sensitive to U.S. consumption growth by studying a sample of currencies with emerging economies. It is clear that there is a correlation between the economic crisis and consumption growth in the U.S. Also, the idea that abnormally high VIX index, which reflects risk tolerance, leads to loss of profits in hedging transactions (Brunnermeier, 2008) is consistent with the above two findings  although there is a potential risk of profit loss in hedging transactions, since hedging transactions is profitable over a longer period of time, when looking at foreign exchange hedging behavior, one needs to consider whether foreign exchange hedging is also accompanied by interest rate hedging transactions, i.e., whether spreads affect foreign exchange hedging behavior  The 3-month LIBOR averages for the aforementioned currencies during 19992012 are: the US dollar 2.8%, the Australian dollar 5.33%, the British pound 3.85%, the Canadian dollar 2.99%, Euro 2.67%, Swiss Franc 1.26%, Japanese Yen 0.29% If an investor is willing to use a hedging strategy in a foreign exchange hedge to gain excess returns, then the investor would be willing to hold more Australian, British Pound and Canadian Dollars which is related to the conclusion that since these 3 currencies are positively correlated with the stock market movements and make investors want to sell them short to hedge This deviates from the findings of Compbell et al. 2010, which concluded that developed economy currencies with unconditionally high interest rates are in some sense more beta relative to global equity markets, but currencies with transiently high interest rates do not have this characteristic. Therefore, for risk aversion reasons, investors do not execute an unconditional hedge trade in FX hedging, but execute a conditional hedge trade, i.e. investing in currencies with temporarily high interest rates.