Foreign exchange volatility and the use of currency derivatives
Visapää, Tuure Topias (2015)
2015
Tuotantotalouden koulutusohjelma
Talouden ja rakentamisen tiedekunta - Faculty of Business and Built Environment
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Hyväksymispäivämäärä
2015-06-05
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:tty-201505061252
https://urn.fi/URN:NBN:fi:tty-201505061252
Tiivistelmä
This thesis examines the relation between foreign exchange volatility, i.e. the changes in the exchange rates, and the use of currency derivatives among Finnish non-financial companies that are customers of the case bank. Non-financial companies’ primary purpose of using currency derivatives is to hedge their foreign currency cash flows, and volatility is commonly used measure for risk in the foreign exchange market. Furthermore, previous studies have found that derivatives trading may have effect on spot rate volatility, and thus the relation is examined bidirectionally.
The currency pairs in focus are Euro-US dollar (EURUSD), Euro-Swedish krona (EURSEK) and Euro-Norwegian krona (EURNOK). The time period is from 2004 to 2014, and the period is divided into three slots before, during and after the financial crisis. The products in scope are currency forwards and options. The aim of this thesis is to test whether there is any relation or causality between volatility and the use of currency derivatives. The measures used for hedging behavior are derivatives’ volume, number of deals and average maturity. The relation and causality are tested using vector autoregressive model and Granger causality test.
The overall results show that no extensive relation exists between volatility and the use of currency derivatives. Weak evidence is found that non-financial companies’ derivatives trading depend on volatility after the financial crisis for the currency pair EURUSD. Previous studies have found more evidence that the relation exists, but no studies are conducted with similar sample group and same currency pairs. The results of this thesis suggest that different factors than volatility are likely to act as the drivers for the use of currency derivatives, and that the companies use different measures than volatility to measure their market risk, if measures are used whatsoever. The results imply that derivative-providing banks should educate their customers about market risks and strive to build risk management policies, which would enable companies to systematically measure and hedge their market risks.
The currency pairs in focus are Euro-US dollar (EURUSD), Euro-Swedish krona (EURSEK) and Euro-Norwegian krona (EURNOK). The time period is from 2004 to 2014, and the period is divided into three slots before, during and after the financial crisis. The products in scope are currency forwards and options. The aim of this thesis is to test whether there is any relation or causality between volatility and the use of currency derivatives. The measures used for hedging behavior are derivatives’ volume, number of deals and average maturity. The relation and causality are tested using vector autoregressive model and Granger causality test.
The overall results show that no extensive relation exists between volatility and the use of currency derivatives. Weak evidence is found that non-financial companies’ derivatives trading depend on volatility after the financial crisis for the currency pair EURUSD. Previous studies have found more evidence that the relation exists, but no studies are conducted with similar sample group and same currency pairs. The results of this thesis suggest that different factors than volatility are likely to act as the drivers for the use of currency derivatives, and that the companies use different measures than volatility to measure their market risk, if measures are used whatsoever. The results imply that derivative-providing banks should educate their customers about market risks and strive to build risk management policies, which would enable companies to systematically measure and hedge their market risks.