Cross-Currency Hedging as an Alternative to Forward and Money Market Hedging in an Emerging Financial Market

Imad A. Moosa

Abstract

This study examines the effectiveness of cross-currency hedging compared to that of forward hedging and money market hedging, using the Kuwaiti dinar as a base currency. It demonstrates that cross-currency hedging is not effective because the exchange rate arrangement produces low exchange rate correlations. A policy recommendation based on the findings is that the hedging function can benefit enormously from the existence of sophisticated financial markets.

JEL Classification Numbers: G15, F30
Keywords: Cross Hedging, Correlation, Foreign Exchange Exposure

Department of Economics and Finance, La Trobe University, Victoria, 3083, Australia, E-mail: i.moosa@latrobe.edu.au

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