• The Korean Journal of Financial Management
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• v.21 no.1
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• pp.231-253
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• 2004

We examine hedge strategies that use Won-dollar futures to hedge the price risk of the Won-dollar exchange rate. We employ the naive hedge model, minimum variance hedge model and bivariate ECT-ARCH(1) model as hedge instruments, and analyze their hedge performances. The sample period covers from January 2, 2001 to December 31, 2002 with sub-samples such as daily, weekly, bi-weekly prices of the Won-dollar futures and cash. The important findings may be summarized as follows. First, there is no significant difference in hedge ratio between the risk minimum variance model and bivariate ECT-ARCH(1) model that controls for the cointegration relationship of the Won-dollar futures and cash. Second, hedge performance of the naive model and minimum variance model with constant hedge ratios is not far behind that of bivariate ECT-ARCH(1) model with time-varying hedge ratios. This results imply that investors are encouraged to use the minimum variance hedge model to hedge Won-dollar exchange rate with Won-dollar futures. Third, hedge performance and effectiveness of each model is also analyzed with respect to hedge period appear to be greater over long than over the short period. This evidence supports the hypothesis that futures prices would have more time to respond to the greater cash price changes over the longer holding period, leading to an improved hedge performance.

• The Korean Journal of Financial Management
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• v.23 no.1
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• pp.49-67
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• 2006

This study examines whether won/dollar futures have price discovery function and volatility spillover effect or not, using intraday won/dollar futures prices, volumes, and spot rates for the interval from March 2, 2005 through May 30, 2005. Futures prices and spot rates are non-stationary, but there is the cointegration relationship between two time series. Futures returns, spot returns, and volumes are stationary. Asymmetric effects on volatility in futures returns and spot returns does not exist. Analytical results of mean equations of the BGARCH-EC (bivariate GARCH-error correction) model show that the increase of futures returns raise spot returns after 5 minutes, which implies that futures returns lead spot returns and won/dollar futures have price discovery function. In addition, the long-run equilibrium relationship between the two returns could help forecast spot returns. Analytical results of variance equations indicate that short-run innovations in the futures market positively affect the conditional variances of spot returns, that is, there is the volatility spillover effect in the won/dollar futures market. A dummy variable of volumes does not have an effect on two returns but influences significantly on two conditional variances.

• The Korean Journal of Financial Management
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• v.27 no.1
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• pp.1-30
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• 2010

This paper tested the lead-lag relationship as well as the symmetric and asymmetric volatility spillover effects between international currency futures markets and cash markets. We use five kinds of currency spot and futures markets such as British pound, Australian and Canadian dollar, Brasilian Real and won/dollar spot and futures markets. daily closing prices covering from September 15, 2003 to July 30, 2009. For this purpose we employed dynamic time series models such as the Granger causality based on VAR and time-varying MA(1)-GJR-GARCH(1, 1)-M. The main empirical results are as follows; First, according to Granger causality test, we find that the bilateral lead-lag relationship between the five countries' currency spot and futures market. The price discover effect from currency futures markets to spot market is relatively stronger than that from currency spot to futures markets. Second, based on the time varying GARCH model, we find that there is a bilateral conditional mean spillover effects between the five currency spot and futures markets. Third, we also find that there is a bilateral asymmetric volatility spillover effects between British pound, Canadian dollar, Brasilian Real and won/dollar spot and futures market. However there is a unilateral asymmetric volatility spillover effect from Australian dollar futures to cash market, not vice versa. From these empirical results we infer that most of currency futures markets have a much better price discovery function than currency cash market and are inefficient to the information.

• The Korean Journal of Financial Management
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• v.25 no.1
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• pp.1-22
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• 2008

This study is to evaluate, to the extent to, which advanced currency futures and emerging currency futures markets can predict accurately the future spot rate. To this end, Johansen's the maximum-likelihood cointegration method(1988, 1991) is adopted to test the unbiasedness and efficiency hypothesis. Also, this study is to estimate and compare a quantitative measure of relative efficiency as a ratio of the forecast error variance from the best-fitting quasi-error correction model to the forecast error variance of the futures price as predictor of the spot price in advanced currency futures with in emerging currency futures market. Advanced currency futures is British pound and Japan yen. Emerging currency futures includes Korea won, Mexico peso, and Brazil real. The empirical results are summarized as follows : First, the unbiasedness hypothesis is not rejected for Korea won and Japan yen futures exchange rates. This indicates that the emerging currency Korea won and the advanced currency Japan yen futures exchange rates are likely to predict accurately realized spot exchange rate at a maturity date without the trader having to pay a risk premium for the privilege of trading the contract. Second, in emerging currency futures markets, the unbiasedness hypothesis is not rejected for Korea won futures market apart from Mexico peso and Brazil real futures markets. This indicates that in emerging currency futures markets, Korea won futures market is more efficient than Mexico peso and Brazil real futures markets and is likely to predict accurately realized spot exchange rate at a maturity date without risk premium. Third, this findings show that the results of unbiasedness hypothesis tests can provide conflicting finding. according to currency futures class and forecasts horizon period, Fourth, from the best-fitting quasi-error correction model with forecast horizons of 14 days, the findings suggest the Japan yen futures market is 27.06% efficient, the British pound futures market is 26.87% efficient, the Korea won futures market is 20.77% efficient, the Mexico peso futures market is 11.55%, and the Brazil real futures market is 4.45% efficient in the usual order. This indicates that the Korea won-dollar futures market is more efficient than Mexico peso, and Brazil real futures market. It is therefore possible to concludes that the Korea won-dollar currency futures market has relatively high efficiency comparing with Mexico peso and Brazil real futures markets of emerging currency futures markets.

• The Korean Journal of Financial Management
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• v.26 no.2
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• pp.155-180
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• 2009

This study is to estimate and compare hedging effectiveness in emerging currency and advanced currency futures markets. Emerging currency futures includes Korea won, Mexico peso, and Brazil real and advanced currency futures is Europe euro, British pound, and Japan yen. Hedging effectiveness is measured by comparing hedging performance of the naive hedge model, OLS model, error correction model and constant condintional correlation bivariate GARCH(1, 1) hedge model based on rolling windows. Analysis data is used daily spot and futures rates from January, 2, 2001 to March. 10, 2006. The empirical results are summarized as follows : First, irrespective of hedging period and model, hedging using Korea won/dollar futures reduces spot rate's volatility risk by 97%. Second, Korea won/dollar futures market produces the best hedging performance in emerging and advanced currency futures markets, i.e. Mexico peso, Brazil real, Europe euro, British pound, and Japan yen. Third, there are no difference of hedging effectiveness among hedging models.