Financial impact of using EUR call options to hedge accounts receivables
Article Metrics Report
Views, downloads, citations, engagementCited by
Current citation countResearch summary
International business has grown rapidly in recent years as companies seek to take advantage of expanding supply chain opportunities. As companies enter into contracts to take advantage of engineering, production, and cost reduction capabilities of the global supply chain, they may be creating a foreign currency exchange rate risk. The purpose of this research was to determine the EUR/USD exchange rate risk within a relatively short time frame such as in 60-day accounts receivable and if using currency options to hedge this risk would be financially beneficial on a transactional basis. The quantitative study examined the 60-day EUR/USD exchange rate fluctuation and the use of currency call options to hedge the risk associated with EUR/USD currency fluctuations. The researcher analyzed 13 years of historical EUR/USD currency data and 10 years of actual EUR call options premiums for this research paper. The researcher concluded that the variability of the EUR/USD over 60-days does pose financial risk to a company. The study also found that using currency call options to hedge this 60-day exchange rate risk resulted in an overall transactional financial loss as compared to no hedging. However, research studies have shown that the use of hedging instruments to smooth financial results may result in lower overall financing costs which could offset the hedging transactional costs. This study did not address the benefits of the use of hedging to smooth financial results or obtain other related financial benefits. The researcher recommends that a firm should recognize the exchange rate risks it may be establishing within 60-day EUR or USD payable contracts and develop an appropriate hedging strategy.
Article History
How to Cite
Mcewan, K. B.. (2021). Financial impact of using EUR call options to hedge accounts receivables. International Journal of Business and Economic Development, Volume 09 Issue 02. https://doi.org/10.24052/IJBED/V09N02/ART-01
Citation Context
APA
Mcewan, K. B.. (2021). Financial impact of using EUR call options to hedge accounts receivables. International Journal of Business and Economic Development, Volume 09 Issue 02. https://doi.org/10.24052/IJBED/V09N02/ART-01
MLA
Mcewan, Kenneth B.. "Financial impact of using EUR call options to hedge accounts receivables." International Journal of Business and Economic Development, Volume 09 Issue 02, 2021. https://doi.org/10.24052/IJBED/V09N02/ART-01
Chicago
Kenneth B. Mcewan. "Financial impact of using EUR call options to hedge accounts receivables." International Journal of Business and Economic Development Volume 09 Issue 02 (29 Nov 2021). https://doi.org/10.24052/IJBED/V09N02/ART-01
Harvard
Mcewan, K. B. (2021) Financial impact of using EUR call options to hedge accounts receivables. International Journal of Business and Economic Development, Volume 09 Issue 02. https://doi.org/10.24052/IJBED/V09N02/ART-01
References
- Aljarrah, M.A., Famoye, F., Lee, C., (2019). A new generalized normal distribution: Properties and applications. Commun. Stat. - Theory Methods 48, 4474–4491.
- https://doi.org/10.1080/03610926.2018.1483509
- Ardoin, E., Rodriguez, A., (2017). Negative interest rates and a possible rift in interest rate parity and arbitrage. Int. J. Bus. Account. Finance 11, 48–62.
- Baranga, L.P., (2016). Study on the new financial products traded on the FOREX market. Bull. Transilv. Univ. Brasov Ser. V Econ. Sci. 9, 179–188.
- Bayas, A., (2018). Currency Risk Management: Predicting the EUR/USD Exchange Rate. Major Qualif. Proj. Years.
- Bessler, W., Conlon, T., Huan, X., (2019). Does corporate hedging enhance shareholder value? A meta-analysis. Int. Rev. Financ. Anal. 61, 222–232. https://doi.org/10.1016/j.irfa.2018.11.010
- Bloom, R., Cenker, W.J., (2008). Derivatives and hedging: Accounting vs. taxation. J. Account. 206, 54–58.
- Broll, U., Wong, K., (2015). Trade and cross hedging exchange rate risk. Int. Econ. Econ. Policy 12, 509–520. https://doi.org/10.1007/s10368-014-0291-x
- Buen Sin Low, Shaojun Zhang, (2005). The volatility risk premium embedded in currency options. J. Financ. Quant. Anal. 40, 803–832.
- Campello, M., Lin, C., Ma, Y., Zou, H., (2011). The real and financial implications of corporate hedging. J. Finance 66, 1615–1647. https://doi.org/10.1111/j.1540-6261.2011.01683.x
- Chen, S.-N., Hsu, P.-P., & Liang, K.-Y. (2019). Option pricing and hedging in different cyclical structures: A two-dimensional Markov-modulated model. The European Journal of Finance, 25(8), 762–779. https://doi.org/10.1080/1351847X.2018.1538895
- Cevik, S., Harris, R.D.F., Yilmaz, F., (2017). Soft power and exchange rate volatility. Int. Finance 20, 271–288. https://doi.org/10.1111/infi.12117
- Charvin, V., Fullwood, J., James, J., (2014). The fair value of FX options. Do you get what you pay for? Quant. Finance 14, 15–23. https://doi.org/10.1080/14697688.2013.787493
- Costantini, M., Cuaresma, J.C., Hlouskova, J., (2016). Forecasting errors, directional accuracy and profitability of currency trading: The case of EUR/USD exchange rate. J. Forecast. 35, 652–668. https://doi.org/10.1002/for.2398
- Crowder, W.J., (2014). Real exchange rate persistence in US dollar PPP systems. Int. Finance 17, 209–240. https://doi.org/10.1111/infi.12048
- Doval, E., (2016). Is outsourcing a strategic tool to enhance the competitive advantage? Rev. Gen. Manag. 23, 78–87.
- Edens, C., (2010). A holistic view of corporate foreign exchange exposure management. J. Corp. Treas. Manag. 3, 341–347.
- Engel, C., (2016). Exchange rates, interest rates, and the risk premium. Am. Econ. Rev. 106, 436–474.
- Frishberg, M., Gobble, M.M., (2013). Considering exchange rate risk in outsourcing. Res. Technol. Manag. 56, 5–7. https://doi.org/10.5437/08956308X5605001
- Galeshchuk, S., Mukherjee, S., (2017). Deep networks for predicting direction of change in foreign exchange rates. Intell. Syst. Account. Finance Manag. 24, 100–110. https://doi.org/10.1002/isaf.1404
- Gylling, M., Heikkilä, J., Jussila, K., Saarinen, M., (2015). Making decisions on offshore outsourcing and backshoring: A case study in the bicycle industry. Int. J. Prod. Econ. 162, 92–100. https://doi.org/10.1016/j.ijpe.2015.01.006
- Issing, O., (2018). America’s dollar power politics. Int. Econ. 32, 46–69.
- Jankensgård, H., Hoffmann, K., & Rahmat, D. (2014). Derivative usage, risk disclosure, and firm value. Journal of Accounting & Finance (2158-3625), 14(5), 159–174.
- Kroes, J.R., Manikas, A.S., (2014). Cash flow management and manufacturing firm financial performance: A longitudinal perspective. Int. J. Prod. Econ. 148, 37–50. https://doi.org/10.1016/j.ijpe.2013.11.008
- Kumar, V.R., Joshi, G., (2014). Testing efficient market hypothesis in the foreign exchange market. CLEAR Int. J. Res. Commer. Manag. 5, 4–16.
- Ljung, G.M., Ledolter, J., Abraham, B., (2014). George Box’s contributions to time series analysis and forecasting. Appl. Stoch. Models Bus. Ind. 30, 25–35. https://doi.org/10.1002/asmb.2016
- Magee, S., (2013). The effect of foreign currency hedging on the probability of financial distress. Account. Finance 53, 1107–1127. https://doi.org/10.1111/j.1467-629X.2012.00489.x
- Manzur, M., Hoque, A., Poitras, G., (2010). Currency option pricing and realized volatility. Bank. Finance Rev. 2, 73–85.
- McMillan, C.J., Overall, J.S., (2017). Crossing the chasm and over the abyss: Perspectives on organizational failure. Acad. Manag. Perspect. 31, 271–287. https://doi.org/10.5465/amp.2017.0018
- Mishler, M.D., (2017). Currency turmoil, price, and profit in global markets. J. Account. 223, 1–6.
- Moosa, I.A., (2004). Is there a need for hedging exposure to foreign exchange risk? Appl. Financ. Econ. 14, 279–283. https://doi.org/10.1080/0960310042000201219
- Parlapiano, F., Alexeev, V., Dungey, M., (2017). Exchange rate risk exposure and the value of European firms. Eur. J. Finance 23, 111–129. https://doi.org/10.1080/1351847X.2015.1072570
- Pérez‐González, F., Yun, H., (2013). Risk management and firm value: Evidence from weather derivatives. J. Finance 68, 2143–2176. https://doi.org/10.1111/jofi.12061
- Pilbeam, K., Langeland, K.N., (2015). Forecasting exchange rate volatility: GARCH models versus implied volatility forecasts. Int. Econ. Econ. Policy 12, 127–142. https://doi.org/10.1007/s10368-014-0289-4
- Saundage, D., Cybulski, J.L., Dharmasena, L., Keller, S., (2016). Teaching data analysis with interactive visual narratives. J. Inf. Syst. Educ. 27, 233–247.
- Spreckelsen, C., Mettenheim, H.-J., Breitner, M.H., (2014). Real-time pricing and hedging of options on currency futures with artificial neural networks. J. Forecast. 33, 419–432. https://doi.org/10.1002/for.2311
- Stulz, R., (2013). How companies can use hedging to create shareholder value. J. Appl. Corp. Finance 25, 21–29. https://doi.org/10.1111/jacf.12038
- Treanor, S.D., Rogers, D.A., Carter, D.A., Simkins, B.J., (2014). Exposure, hedging, and value: new evidence from the U.S. airline industry. Int. Rev. Financ. Anal. 34, 200–211. https://doi.org/10.1016/j.irfa.2014.04.002
- VanderLinden, D., (2014). Is hedging foreign currency bids with options desirable? An applied analysis for small firms. J. Appl. Financ. Res. 1, 9–19.
- Veestraeten, D., (2013). Currency option pricing in a credible exchange rate target zone. Appl. Financ. Econ. 23, 951–962. https://doi.org/10.1080/09603107.2013.778945
- Weltman, D., Eakin, M., (2018). Basic guidelines for common business statistics metrics. Bus. Educ. Innov. J. 10, 21–26.
- Witkowska, J., (2017). Implications of the transatlantic trade and investment partnership (TTIP) for investment flows between the European Union and the USA. Comp. Econ. Res. 20, 25–39. https://doi.org/10.1515/cer-2017-0018
- Wong, K.P., (2017). Cross-hedging ambiguous exchange rate risk. J. Futur Mark. 37, 132–147. https://doi.org/10.1002/fut.21793