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Volume 7, Numbers 1 & 2 / March/June 2003 , Pages 1-106
Multinational Finance Journal, 2003, vol. 7, no. 1 & 2 , pp. 3-23 |
Anthony J. Seymour , University of Cape Town, South Africa    Corresponding Author
Daniel A. Polakow , University of Cape Town and Cadiz Holdings, South Africa

This research is aimed at a formal appraisal of recent advancements in stochastic volatility modeling and extreme-value theory to application of value-at- risk computation in particularly volatile markets. Established methods such as historical simulation are prone to underestimating value-at-risk in such developing markets. Two contemporary methods of value-at-risk calculation are tested on a representative portfolio of South African stocks. The first method incorporates extreme value theory. The second model includes both extreme value theory and volatility updating (via GARCH-type modeling). The combined GARCH-type time-series approach and extreme value theory model is found to provide significantly better results than both straightforward historical simulation as well as the extreme value model. In no instance, however, were results on these VaR methods as good as those obtained when the same methods were tested in developed markets. This research highlights noteworthy improvements to value-at-risk estimation efficacy in volatile emerging markets, and also stresses the need for further work into the estimation of value-at-risk in this context.

Keywords : backtesting; extreme value theory; GARCH, historical simulation; RiskMetrics; value-at-risk
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Multinational Finance Journal, 2003, vol. 7, no. 1&2, pp. 25-54 |
Kam Fong Chan , University of Queensland, Australia    Corresponding Author
Christopher Gan , Lincoln University, New Zealand
Patricia A. McGraw , Lincoln University, New Zealand

A survey on derivative usage and financial risk management in New Zealand shows that the currency forward is the most frequently used derivatives in hedging transaction exposure. This paper examines whether forwards performs better than over-the-counter option for a New Zealand exporter in hedging NZD/USD transaction exposure. This research adopts H sin, Kuo and Lee’s (1994) model of hedging effectiveness which maximizes the exporter’s expected negative exponential utility function to compare and evaluate the ex-ante hedging effectiveness of both forwards and options synthetic forwards. The results show that prior to the 1997 Asian Crisis, forwards are marginally more effective than options synthetic forwards for an ordinary risk-averse exp orter to hedge against her/his 1, 3, 6 and 12-month transaction exposures. However, during and after the 1997 Asian Crisis, options synthetic forwards are more effective than forwards for hedging exposures of 1, 3 and 6 months. The results are robust to the exporter’s degree of absolute risk aversion.

Keywords : forwards; hedging effectiveness; optimal hedge ratio; options synthetic forwards; utility maximization
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Multinational Finance Journal, 2003, vol. 7, no. 1 & 2 , pp. 55-82 |
Jean-Yves Datey , Comission Scolaire de Montréal, Canada    Corresponding Author
Geneviève Gauthier , HEC Montréal, Canada
Jean-Guy Simonato , HEC Montréal, Canada

An option contract now commonly encountered is the Asian quanto-basket option. This contract is useful for risk managers willing to participate to the return of an industrial sector with an international exposure without the foreign exchange risk exposition. Although the price of such contracts can be obtained very accurately using Monte Carlo simulation, market participants prefer faster but less accurate analytical approximations. This paper thus examines the precision of three different analytical approximations available to price Asian quanto-basket options. The results of a comprehensive simulation experiment performed on a large test pool of option contracts reveal that the approximations based on the reciprocal gamma and Johnson-type densities are in general the most accurate.

Keywords : analytical approximation; Asian option; basket option; option pricing; quanto option
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Multinational Finance Journal, 2003, vol. 7, no. 1&2, pp. 83-106 |
C. J. Adcock , The University of Sheffield, UK    Corresponding Author

This paper reports a study into the performance of currency-hedged portfolios constructed using mean-variance optimization methods. The method is to carry out optimization relative to a benchmark portfolio, which consists of the real assets, and simultaneously to determine the optimal exposures to each currency future. This is done at various levels of risk along the efficient frontier. A study into a portfolio of international stock and bond indices viewed from a US Dollar perspective indicates that, for the period studied, optimal currency hedging has the potential to add value in terms of additional expected return and excess return on a risk-adjusted basis. The results also demonstrate the superiority of strategies in which the hedge ratio is optimally determined over those with a fixed hedge ratio.

Keywords : exchange rate risk; currency hedging; mean-variance optimization
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