Risk Management and Profit-Loss Analysis of Foreign Currency Risks During Low-Interest-Rate Periods: A Case Study of NTD/NZD

Abstract

In recent years, central banks in many countries have adopted quantitative easing monetary policy which induces lower-interest-rates; take Taiwan as an example, currently the interest rates for short-term (one year or shorter) time-deposits range from .1%~1%. Yet, foreign banks offer short-term deposits with interest rates between 1%~5% which greatly welcome by investors. The drawback for foreign currency deposits is the greatly fluctuated exchange rates. In the past, foreign exchange hedging related literature used the majority of foreign exchange contracts and foreign exchange options for the hedging strategy of the NT dollar against the US dollar, with less research taking financial returns and exchange risk aversion into account. This study aims to explore how enterprises use their short-term funds to buy NZD time deposits considering both the possibility of profits and the avoidance of fluctuated exchange rate risks. This result reveals that buying NZD time deposits fixed with USD index futures is an excellent hedging decision for enterprises to use their funds in a more flexible way considering profits and risk avoidance.

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Author Information
Li-Ning Kang, National Quemoy University, Taiwan
Hsing-Kuo Wang, National Quemoy University, Taiwan
Yu-Fang Yen, National Quemoy University, Taiwan
Liang Tsai, National Quemoy University, Taiwan
Jonathan Lu, County College of Morris, United States

• Category: ACSS2017, Oral Presentation
• Tag: Economics and Management,

Posted by James Alexander Gordon

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