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Hedging and effectiveness of Indian currency futures market

Varuna Kharbanda (Delhi School of Management, Delhi Technological University, Delhi, India)
Archana Singh (Delhi School of Management, Delhi Technological University, Delhi, India)

Journal of Asia Business Studies

ISSN: 1558-7894

Article publication date: 24 February 2020

Issue publication date: 7 December 2020

418

Abstract

Purpose

The purpose of this paper is to measure the effectiveness of the hedging with futures currency contracts. Measuring the effectiveness of hedging has become mandatory for Indian companies as the new Indian accounting standards, Ind-AS, specify that the effectiveness of hedges taken by the companies should be evaluated using quantitative methods but leaves it to the company to choose a method of evaluation.

Design/methodology/approach

The paper compares three models for evaluating the effectiveness of hedge – ordinary least square (OLS), vector error correction model (VECM) and dynamic conditional correlation multivariate GARCH (DCC-MGARCH) model. The OLS and VECM are the static models, whereas DCC-MGARCH is a dynamic model.

Findings

The overall results of the study show that dynamic model (DCC-MGARCH) is a better model for calculating the hedge effectiveness as it outperforms OLS and VECM models.

Practical implications

The new Indian accounting standards (Ind-AS) mandates the calculation of hedge effectiveness. The results of this study are useful for the treasurers in identifying appropriate method for evaluation of hedge effectiveness. Similarly, policymakers and auditors are benefitted as the study provides clarity on different methods of evaluation of hedging effectiveness.

Originality/value

Many previous studies have evaluated the efficiency of the Indian currency futures market, but with rising importance of hedging in the Indian companies, Reserve Bank of India’s initiatives and encouragement for the use of futures for hedging the currency risk and now the mandatory accounting requirement for measuring hedging effectiveness, it has become more relevant to evaluate the effectiveness of hedge. To the authors’ best knowledge, this is one of the first few papers which evaluate the effectiveness of the currency future hedging.

Keywords

Citation

Kharbanda, V. and Singh, A. (2020), "Hedging and effectiveness of Indian currency futures market", Journal of Asia Business Studies, Vol. 14 No. 5, pp. 581-597. https://doi.org/10.1108/JABS-10-2018-0279

Publisher

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Emerald Publishing Limited

Copyright © 2020, Emerald Publishing Limited

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