Currency Hedging Essay Example | Topics and Well Written Essays - 5500 words

Currency Hedging - Essay ExampleFor example investors bank their hopes on relation net returns such as Net Dividend Yield (NDY) generated by linage related investments. Thus electromotive force investors look at how the growth trajectory of Net Asset Value (NAV) would increase in retentiveness with net returns in relatively less risky spheres of investment.Secondly the risk factor associated with notes merchandise related investments is proportionately higher when foreign replacement related investments take a plunge cod to uncertain government policies. For example if the government concerned allows its own currency to depreciate externally in order to correct a deficit in the trade balance of the balance of payment, investors would be caught on the wrong foot if they happen to bank their hopes constantly on the continuity of government insurance policy (Maskey, 1995).third the government may adopt anti-inflationary measures such as higher corporate taxes and expenditure ta xes. The net conclusion would be less investment and less borrowing. Currency markets become dormant during such periods of controvert policy initiative.Foreign exchange rates and take rates ... s are positively related because when interest rates fall the exchange rates also fall because potential foreign investors do not buy the domestic currency concerned for investment when the domestic interest rates fall and as a result the demand for the domestic currency abroad falls thus leading to an invidious exchange rate (Larsen, & Resnick, 2000). Hedge funds, mutual funds, pension funds, commercial banks and other money market players piddle a tendency to hedge risk by minimizing the degree of exposure to adverse consequences arising from unfavorable exchange rates, inflation and investment related uncertainties such as a continuous fall in stock prices (Biger, & Hull, 1983). 2. Analysis2.1. What is Currency Hedging Currency hedging has become a very controversial case in modern money market operations (Adler, & Prasad, 1992). Commercial banks and other market players have pick out passing strategic exclusive policy initiatives to deal with the problem. This paper investigates the relative efficacy of such highly complex approaches to currency hedging adopted by different market players, while at the like time focusing attention on the doubt expressed by modern writers about the benefits of currency hedging strategies to all market players at a given time.Currency hedging is a technique that is meant to influence and reduce the risks pertain when engaging in some foreign investment strategy. Essentially the very genius of a currency hedging effort would be more beneficial in obviating the negative outcomes from any shifts in the relative value of the currency as utilized in the investment unconscious process (Levy, & Lim, 1994). This is intended to shield the investor from negative shifts in the money market so that even if the currency involved take s a plunge