An Empirical Analysis of Hedging Instruments for Canadian Importers and Exporters: Option Contracts on USD/CAD (USX) in 2010

ABSTRACT: In a globalized world, international business managers deal with the international trade of goods and services and are exposed to financial exchange rate risk. The traders transfer various merchandizes and services among countries with the aim of making profit. However, their profit is sometimes affected by the fluctuations in the exchange rates during the trading period. The traders have some choices to cover their foreign exchange risk. This study makes an empirical analysis of different hedging strategies through option contracts on USD for covering the currency risk of Canadian importers and exporters from/to United States of America during 2010. The findings show that for both Canadian importers and exporters, the hedged positions via shorting the options had performed better than the unhedged positions in most cases during the analysis period. However, the unhedged positions had performed better than the hedged positions via longing the options during the same period. The results related to synthetic hedging position, which is a combination of shorting and longing the options, show that the hedged positions for Canadian exporters had performed better than the unhedged position whereas the unhedged positions for Canadian importers had performed generally better than the hedged positions during 2010. Keywords: foreign exchange market, currency hedging, exporters, importers, Canada. …………………………………………………………………………………………………………………………