1 Matthew P.

Erickson (2014) 1 had done a study on Asset Rotation: The Demise of Modern
Portfolio Theory and the Birth of an Investment Renaissance in his argument heralding the
demise of modern portfolio theory (MPT) seems weak, he offers a compelling argument for
active management. Using exchange-traded funds and asset rotation, he demonstrates how to
achieve a return superior to that of a passively managed fund that relies on MPT and index
funds. Asset Rotation may well be a harbinger of an investment renaissance and the end of
passive management.
Asset Rotation: The Demise of Modern Portfolio Theory and the Birth of an Investment
Renaissance (2014). By Matthew P. Erickson

2 Enrico Moretto, Stefano Rossi, (2008) had done a study on "Exchange ratio determination
in a market equilibrium". The paper aims to present an exchange ratio for merging companies
that incorporates the change in the level of riskiness. The paper offers a formula that
determines a riskadjusted exchange ratio that takes into account both risk and synergy. The
use of the formula allows the identification of whether the offered exchange ratio fully
reflects the expected return/risk profile for stockholders of the merging companies.

Enrico Moretto, Stefano Rossi, (2008) "Exchange ratio determination in a market

equilibrium", Managerial Finance, Vol. 34 Iss: 4, pp.262 - 270

3 Abdulrahman Ali AlTwaijry, (2007) had done a study "Dividend policy and payout ratio:
evidence from the Kuala Lumpur stock exchange". The purpose of this research is to identify
the variables with an expected influence on dividend policy and on payout ratio in an
emerging market. This paper explores the dividend policy and the payout ratio of listed
companies in a fastgrowing market that has received inadequate research attention. The
paper thus adds to the body of accounting knowledge

Abdulrahman Ali AlTwaijry, (2007) "Dividend policy and payout ratio: evidence from the
Kuala Lumpur stock exchange", The Journal of Risk Finance, Vol. 8 Iss: 4, pp.349 - 363

4 Bruno Giacomello, (2008) "Exchange ratios in a merger with stochastic capital reserves:
fair valuation and embedded options". The purpose of this paper is to analyze how exchange
ratios in mergers can be assessed when the companies economic capital valuation is carried
out in a stochastic framework with financial assets and minimum guarantees.
The paper presents a financial model to evaluate the differences in exchange ratios induced
by stochastic capital reserves in the merging companies.

Bruno Giacomello, (2008) "Exchange ratios in a merger with stochastic capital reserves: fair
valuation and embedded options", Managerial Finance, Vol. 34 Iss: 4, pp.239 251

5 Hemantha S.B. Herath, John S. Jahera Jr, (2002) "Real options: valuing flexibility in
strategic mergers and acquisitions as an exchange ratio swap". In recent years, practitioners
and academics have argued that traditional discounted cash flow (DCF) valuation models do
not adequately capture the value of managerial flexibility to delay, grow, scale down or
abandon projects. The insight is that a business investment opportunity can be conceptually
compared to a financial option. The purpose of this paper is to develop a theoretical model
based on option pricing theory to value managerial flexibility arising in stock for stock
exchanges. The paper shows how a mergers and acquisition (M&A) deal may be optimally
structured as a real options swap by including managerial flexibility of both the acquiring and
target firms when stock prices are volatile. Using a recent acquisition case example from US
banking industry the paper illustrates how the proposed exchange ratio swap optimize deal
value and avoids earnings per share (EPS) dilution to both parties. Appropriate valuation of
managerial flexibility is important given the historical premiums paid in takeovers. While the
fact that such premiums exist lends some credibility to the idea that at least implicitly
managerial flexibility is valued, the real options approach allows for more explicit valuation
of such flexibility.
Hemantha S.B. Herath, John S. Jahera Jr, (2002) "Real options: valuing flexibility in
strategic mergers and acquisitions as an exchange ratio swap", Managerial Finance,
Vol. 28 Iss: 12, pp.44 - 62

6 Wanncherng Wang, (2005) "An evaluation of the Balanced Scorecard in equity valuation:
The case of exchange ratio in the M&As of Taiwan's financial industry". To examine the
value relevance of the Balanced Scorecard (BSC) for equity valuation. First, the BSC
indicators explain as high as 90 percent of the variations of the exchange ratios. Consistent
with the spirit of BSC, nonfinancial performance measures play an important role in the
valuation of financial institutions, incrementally improving about 40 percent of explanatory
power. Second, empirical evidence shows that acquiring firms outperform the acquired firms
and target firms outperform the nontarget firms in terms of BSC measures.
Wanncherng Wang, (2005) "An evaluation of the Balanced Scorecard in equity valuation:
The case of exchange ratio in the M&As of Taiwan's financial industry", Journal of
Intellectual Capital, Vol. 6 Iss: 2, pp.206 - 221

7 Wolfgang Krsten, (2008) "Synergies, shareholder value and exchange ratios in value
creating mergers: Why shareholders should doubt management's premerger promises". The
purpose of this research paper is to clarify why shareholders should be prudent when
managers promise value gains from a synergetic merger. It is found that shareholders
regularly lose in nonsynergetic mergers, and will not necessarily gain if synergies are
positive. In the model, a corresponding critical level of synergies is calculated explicitly. It is
shown that there are also new value effects induced by moral hazard, which constitute
genuine financial synergies of their own.

Wolfgang Krsten, (2008) "Synergies, shareholder value and exchange ratios in value
creating mergers: Why shareholders should doubt management's premerger promises",
Managerial Finance, Vol. 34 Iss: 4, pp.252 - 261

8 Nick French, Georgina Wiseman, (2003) "The price of space: the convergence of value in
use and value in exchange"This paper discusses concepts of value from the point of view of
the user of the space and the counter view of the provider of the same. Land and property are
factors of production. The value of the land flows from the use to which it is put, and that in
turn, is dependent upon the demand (and supply) for the product or service that is
produced/provided from that space. If there is a high demand for the product (at a fixed level
of supply), the price will increase and the economic rent for the land/property will increase

accordingly. This is the underlying paradigm of Ricardian rent theory where the supply of
land is fixed and a single good is produced. In such a case the rent of land is wholly an
economic rent. Economic theory generally distinguishes between two kinds of price, price of
production or value in use (as determined by the labour theory of value), and market price
or value in exchange (as determined by supply and demand). It is based on a coherent and
consistent theory of value and price. Effectively the distinction is between what space is
worth to an individual and that spaces price of exchange in the market place. In a perfect
market where any individual has access to the same information as all others in the market,
price and worth should coincide. However in a market where access to information is not
uniform, and where different uses compete for the same space, it is more likely that the two
figures will diverge. This paper argues that the traditional reliance of valuers to use methods
of comparison to determine price has led to an artificial divergence of value in use and
value in exchange, but now such comparisons are becoming more difficult due to the
diversity of lettings in the market place, there will be a requirement to return to fundamentals
and pay heed to the thought process of the user in assessing the worth of the space to be le
Nick French, Georgina Wiseman, (2003) "The price of space: the convergence of value in use
and value in exchange", Journal of Property Investment & Finance, Vol. 21 Iss: 1, pp.23 - 30

9 Professor Christine R. Hekman, (1991) "Foreign Exchange Management: New

Opportunities and a New Perspective". Foreign exchange exposure management has
traditionally been viewed by corporate line management as a specialized and arcane corporate
function. From its organizational position in Treasury or International Treasury, the function
and the experts responsible for its execution, are frequently removed from the process of
strategic planning and formulation of objectives. Foreign exchange experts are even less
frequently consulted on matters of marketing and production investments and operation.
Professor Christine R. Hekman, (1991) "Foreign Exchange Management: New Opportunities
and a New Perspective", Managerial Finance, Vol. 17 Iss: 4, pp.5 - 9

10 Kevin James Daly, Colm Kearney, (1998) "Fiscal financing decisions and exchange rate
variability" One of the perceived benefits of a flexible exchange rate system is the insulation
of the domestic economy from foreign shocks, and the potential for independent policy

actions. In view of the considerable uncertainty, which pervades appropriate specification of

the relevant theoretical models, the empirical analysis of this paper adopts the vector
autoregressive approach. Using quarterly data over the period 1975(2)1995(2), models are
estimated which test the effect on exchange rates of fiscal variables for seven countries
(Australia, Canada, Britain, France, Germany, Italy and the USA). In testing the exchange
rate response to a bond financed fiscal expansion, a tax financed fiscal expansion and to a
swap of taxes for debt with no change in the level of government expenditure, the results for
the seven countries over the recent float are mixed because the impulse response functions to
the shocks do not have the same pattern in every country.
Kevin James Daly, Colm Kearney, (1998) "Fiscal financing decisions and exchange rate
variability", Journal of Economic Studies, Vol. 25 Iss: 4, pp.309 - 327

11 Narat Charupat, Peter Miu, (2013) "Recent developments in exchangetraded fund

literature: Pricing efficiency, tracking ability, and effects on underlying securities" The
purpose of this paper is to provide a brief review of three strands of the literature on
exchangetraded funds. The paper starts with a review of the history of the growth of
exchangetraded funds and their characteristics. The paper then examines the key factors and
findings of the existing studies on, respectively, the pricing efficiency, the tracking
ability/performance, and the impact on underlying securities of exchangetraded funds
Narat Charupat, Peter Miu, (2013) "Recent developments in exchangetraded fund literature:
Pricing efficiency, tracking ability, and effects on underlying securities", Managerial Finance,
Vol. 39 Iss: 5, pp.427 - 443

12 Charles K.D. Adjasi, Nicholas B. Biekpe, Kofi A. Osei, (2011) "Stock prices and
exchange rate dynamics in selected African countries: a bivariate analysis" This paper has
benefited from comments from The African Finance Journal Conference July 2006, Cape
Town, South Africa.The paper aims to investigate the relationship between stock prices and
exchange rate movement in seven African countries.Cointegration analyses indicate a long
run relationship between stock prices and the exchange rate in Tunisia, where exchange rate
depreciation drives down stock prices. A shortrun errorcorrection model also shows similar
results. Impulse response analyses for other countries show that stock returns in Ghana,

Kenya, Mauritius and Nigeria reduce when induced by exchange rate shocks but increase in
Egypt and South Africa. Shocks induced by either stock prices or the exchange rate are more
protracted in Ghana, Kenya, Mauritius and Nigeria than in South Africa and Egypt.
Charles K.D. Adjasi, Nicholas B. Biekpe, Kofi A. Osei, (2011) "Stock prices and exchange
rate dynamics in selected African countries: a bivariate analysis", African Journal of
Economic and Management Studies, Vol. 2 Iss: 2, pp.143 164
13 Xiangyun Xu, Peng Guo, (2012) "Exchange rate appreciation expectation, importer's
behavior and choice of invoicing currency: A theoretical model and Yen's empirical evidence"
The purpose of this paper is to develop a model to analyze the role of exchange rate
appreciation expectation in trade invoicing from the perspective of importers, then
empirically analyze it using Japanese export data. It was found that under the assumption of
menu cost, risk neutrality and price rigidity, there are three directions of appreciation
expectation's effect: increasing, unchanged and decreasing theoretically; but under common
condition, only a large appreciation expectation will cause an importer to reduce the use of
exporter's currency, and the role is constricted by exporters' bargaining capacity. The
empirical results of Yen's use in Japan's exports justifies the model's conclusion and shows
that commercial pressure and political events are the most important signals to form large
appreciation expectation.
Xiangyun Xu, Peng Guo, (2012) "Exchange rate appreciation expectation, importer's
behavior and choice of invoicing currency: A theoretical model and Yen's empirical
evidence", China Finance Review International, Vol. 2 Iss: 3, pp.231 - 245

14 Sylvia Maxfield, (2009) "Stock exchanges in low and middle income countries" The
purpose of this paper is to describe and critique the swing in international policy from
encouraging lower income countries to erect local stock exchanges in the 1990s to
discouraging them on efficiency grounds after the US securities markets collapsed in 2001.
Basic indicators of stock exchange performance in lower income countries from the World
Development Indicators database reveal positive trends alongside the less auspicious
indicators emphasized by international organizations opposed to stock exchange development

in lower income countries. A survey of finance and development literature generally, and
work on capital markets specifically, provides evidence of and rationale for the public
benefits of stock exchange development, particularly in emerging market countries. Review
of governance structures of stock exchanges in low and middle income countries finds the
public interest reflected in government participation in stock exchange boards and in their
predominantly nonprofit status. Existing research on stock exchange trading systems
provides a rationale for specific policy choices to encourage stock market performance and
also highlights areas for further policyrelevant research.
Sylvia Maxfield, (2009) "Stock exchanges in low and middle income countries",
International Journal of Emerging Markets, Vol. 4 Iss: 1, pp.43 - 55

15 Abdullah M. Noman, Sarkar Humayun Kabir, Omar K.M.R. Bashar, (2012) "Causality
between stock and foreign exchange markets in Bangladesh" The purpose of this paper is to
uncover the direction of causality between foreign exchange market and stock market in
Bangladesh, where financial markets are yet in their early development stage.
The overall results indicate absence of any causality running between foreign exchange
market and stock market in the full sample and in the subsample created around the stock
market crash.

Abdullah M. Noman, Sarkar Humayun Kabir, Omar K.M.R. Bashar, (2012) "Causality
between stock and foreign exchange markets in Bangladesh", Studies in Economics and
Finance, Vol. 29 Iss: 3, pp.174 - 186

16 Anthony KyereboahColeman, Kwame F. AgyireTettey, (2008) "Effect of exchangerate

volatility on foreign direct investment in SubSaharan Africa: The case of Ghana" The
present study aims at using a broader data set and longer time frame coupled with a relatively
rigorous and robust methodology to examine the effect of real exchange rate volatility on
foreign direct investment (FDI) in a small and developing country such as Ghana.
The study showed that the volatility of the real exchange rate has a negative influence on FDI
inflow and that the liberalization process has not led to a greater inflow of FDI in Ghana. It is

also revealed that while both the stock of FDI and political factors are likely to attract FDI,
most foreign investors do not consider the size of the market in making a decision to invest or
otherwise in Ghana.
Anthony KyereboahColeman, Kwame F. AgyireTettey, (2008) "Effect of exchangerate
volatility on foreign direct investment in SubSaharan Africa: The case of Ghana", The
Journal of Risk Finance, Vol. 9 Iss: 1, pp.52 - 70

17 Barbara R. Lewis, (1993) "Service Quality: Recent Developments in Financial Services"

Banks and other financial services providers are increasingly developing service quality
initiatives. In this article some of the research literature on service quality is considered to
include definitions, determinants and measurement of quality. Attention is also given to
research applications which focus on management, employee and customer perspectives. In
addition, a number of continuing service quality concerns are highlighted, relating to
changing customer expectations, the need for an integrated approach to service quality and
the development of service quality measurement tools.
Barbara R. Lewis, (1993) "Service Quality: Recent Developments in Financial Services",
International Journal of Bank Marketing, Vol. 11 Iss: 6, pp.19 - 25

18 Joost M.E. Pennings, Martin G.M. Wetzels, Matthew T.G. Meulenberg, (1999) "The
marketingfinance interface towards financial services with special reference to the new
services provided by futures exchanges" The financial services industry is one of the fastest
growing service industries. The financial services industry includes financial derivatives
markets such as options and futures markets. In order to ensure survival, firms providing
financial services show a rapid product innovation. However, for financial services the risk of
failure is considerable. Argues that a synthesis between the financial approach and the
marketing approach towards financial services provides a conceptual framework for
analysing the possible success or failure of futures contracts. The synthesis is illustrated by an
empirical study of a new futures contract that might possibly be introduced.
Joost M.E. Pennings, Martin G.M. Wetzels, Matthew T.G. Meulenberg, (1999) "The
marketingfinance interface towards financial services with special reference to the new

services provided by futures exchanges", European Journal of Marketing, Vol. 33 Iss: 5/6,
pp.531 - 547

19 Intekhab (Ian) Alam, (2012) "New service development in India's businesstobusiness

financial services sector" Few research studies have been done to investigate the issue of new
service development (NSD) in an emerging market. To address this gap in the literature the
aim of this paper is to document a study of the NSD process and the strategy of businessto
business financial service firms in India.

Intekhab (Ian) Alam, (2012) "New service development in India's businesstobusiness

financial services sector", Journal of Business & Industrial Marketing, Vol. 27 Iss: 3, pp.228 241

20 Dr. Andrea L. DeMaskey, (1995) "A Comparison of the Effectiveness of Currency Futures
and Currency Options in the Context of Foreign Exchange Risk Management" Exposure risk
managers can hedge exchange rate risk with either currency futures or currency options. It is
generally suggested that hedgers should choose a hedge instrument that matches the risk
profile of the underlying currency position as closely as possible. This advice, however,
ignores the possibility that the hedging effectiveness may differ for the alternate risk
management tools. This study compares the effectiveness of currency futures and currency
options as hedging instruments for covered and uncovered currency positions. Based on
Ederington's portfolio theory of hedging, the results show that currency futures provide the
more effective covered hedge, while currency options (used to construct a synthetic futures
contract) are more effective for an uncovered hedge. Hence, exposure risk managers do not
have to sacrifice hedging effectiveness to obtain the desired risk profile. Corporations
engaged in international business transactions are commonly exposed to exchange rate risk.
Since management is concerned with currency exposure, it can hedge the anticipated
exchange rate risk either with futures or options. The choice of the appropriate hedging tool is
generally influenced by the type of currency exposure (transaction, translation, or economic
risk), the size of the firm, the industry effect, the risk preference of the manager or the firm
and his/her familiarity with the available financial instruments and techniques. It is also
suggested that a hedger should choose a hedge instrument that matches the risk profile of the

underlying currency position as closely as possible. Hence, futures contracts are more
suitable for covered hedges, while option contracts are best used for uncovered hedges.
Hedging effectiveness of these two hedge instruments must be considered as well in order to
evaluate the cost of obtaining the desired risk profile. Some empirical research has shown
that the futures contract provides both an appropriate risk profile and a more effective hedge
than an options contract for covered positions. If these findings also hold for uncovered
currency positions, then the hedging decision involves a tradeoff between the desired risk
profile and hedging effectiveness. That is, a hedger would have to decide whether the extra
risk protection afforded by the attractive risk profile of options is worth the loss in hedging
performance. This study compares the hedging effectiveness of currency futures and currency
options for both covered and uncovered positions. Ederington's riskminimizing approach is
applied to estimate the hedging effectiveness and the least risk hedge ratios which, in turn, are
used to assess the tradeoff between risk profile and hedging performance.

Dr. Andrea L. DeMaskey, (1995) "A Comparison of the Effectiveness of Currency Futures
and Currency Options in the Context of Foreign Exchange Risk Management", Managerial
Finance, Vol. 21 Iss: 4, pp.40 - 51

21 Oscar Varela, Atsuyuki Naka, (1997) "The London International Stock Exchange's
Foreign Currency Exposures to the Dollar, Yen and Mark" This paper studies the exchange
rate exposure of investments by the United States, Japan and Germany in the London
International Stock Exchange (LSE) from 1982 to 1991. Japanese and German investments
are fully exposed to their own exchange rates, and the US is super nominally exposed to its
own exchange rate. No significant changes in exposure are associated with the Plaza and
Louvre Accords. The 1987 worldwide stock market crash exhibits a significant decrease in
US exposure, and increase in German exposure. US, Japanese and German investments are
also fully exposed to their own exchange rates for the periods before and after the 1986 Big
Bang in London, except that US investments are super nominally exposed in the preBig
Bang period.

Oscar Varela, Atsuyuki Naka, (1997) "The London International Stock Exchange's Foreign
Currency Exposures to the Dollar, Yen and Mark", Managerial Finance, Vol. 23 Iss: 7, pp.45 57

22 Raimond Maurer, Shohreh Valiani, (2007) "Hedging the exchange rate risk in international
portfolio diversification: Currency forwards versus currency options". This study seeks to
examine the effectiveness of controlling the currency risk for international diversified mixed
asset portfolios via two different hedge instruments, currency forwards and currency options.
So far, currency forward has been the most common hedge tool, which will be compared here
with currency options to control the foreign currency exposure risk. In this regard, several
hedging strategies are evaluated and compared with one another.
Raimond Maurer, Shohreh Valiani, (2007) "Hedging the exchange rate risk in international
portfolio diversification: Currency forwards versus currency options", Managerial Finance,
Vol. 33 Iss: 9, pp.667 - 692

23 David M. Smith, Christophe Faugre, Ying Wang (2014), Head and Shoulders above the
Rest? The Performance of Institutional Portfolio Managers Who Use Technical Analysis, This
study takes a novel approach to testing the efficacy of technical analysis. Rather than testing
specific trading rules as is typically done in the literature, we rely on institutional portfolio
managers statements about whether and how intensely they use technical analysis,
irrespective of the form in which they implement it. In our sample of more than 10,000
portfolios, about one-third of actively managed equity and balanced funds use technical
analysis. We compare the investment performance of funds that use technical analysis versus
those that do not, using five metrics. Mean and median (3 and 4-factor) alpha values are
generally slightly higher for a cross section of funds using technical analysis, but
performance volatility is also higher. Benchmark-adjusted returns are also higher, particularly
when market prices are declining. The most remarkable finding is that portfolios with greater
reliance on technical analysis have elevated skewness and kurtosis levels relative to portfolios
that do not use technical analysis. Funds using technical analysis appear to have provided a
meaningful advantage to their investors, albeit in an unexpected way.

David M. Smith, Christophe Faugre, Ying Wang (2014), Head and Shoulders above the
Rest? The Performance of Institutional Portfolio Managers Who Use Technical Analysis, in
John W. Kensinger (ed.) Research in Finance (Research in Finance, Volume 29) Emerald
Group Publishing Limited, pp.167 - 189

24 Asrat Tessema, (1989) "The Role of Medium of Exchange in Acquisitions, This paper
investigates the role of method of payment in explaining the differences in returns to a
bidding firm during the announcement period. The results indicate that the bidding firms
returns are negative for equity payment bids and positive and significantly larger for cash
bids. This is consistent with the view that cashoffer announcements constitute a revelation
by management of favorable new information about a firms future cash flows and vice versa
for equity offerings. The results from this study provide an explanation of why business
executives have been reluctant to issue equity even when they are raising the money to
finance profitable projects like acquisitions. Executives relied on internal funds that allowed
them to avoid the flotation costs of issuing new shares and the scrutiny by the financial
market while limiting growth to that sustainable with internally generated funds.
Asrat Tessema, (1989) "The Role of Medium of Exchange in Acquisitions", American Journal
of Business, Vol. 4 Iss: 1, pp.39 - 44

25 Panayiotis F. Diamandis , Anastassios A. Drakos , Georgios P. Kouretas (2014), Exchange

Rates, Fundamentals, and Nonlinearities: A Review and Some Further Evidence from a
Century of Data, The purpose of this paper is to provide an extensive review of the monetary
model of exchange rate determination which is the main theoretical framework on analyzing
exchange rate behavior over the last 40 years. Furthermore, we test the flexible price
monetarist variant and the sticky price Keynesian variant of the monetary model. We conduct
our analysis employing a sample of 14 advanced economies using annual data spanning the
period 18802012.

Panayiotis F. Diamandis , Anastassios A. Drakos , Georgios P. Kouretas (2014), Exchange

Rates, Fundamentals, and Nonlinearities: A Review and Some Further Evidence from a
Century of Data, in Georgios P. Kouretas , Athanasios P. Papadopoulos (ed.) Macroeconomic

Analysis and International Finance (International Symposia in Economic Theory and

Econometrics, Volume 23) Emerald Group Publishing Limited, pp.85 - 124

26 Osman Suliman, (1996) "Economic Growth, Investment, and Exchange Rate Changes in a
PoorCapital Economy" The discussion of the appropriate means to attain external balance
arose as a result of the recurring problem of acute shortages of foreign exchange for many
small, open, developing economies. Thus, as Findlay (1973) and Diamond (1978) contend, it
is now widely held that the critical bottleneck restricting the rate of economic growth in
developing countries is the shortage of foreign exchange. The Latin American structuralist
school and the Indian strategy of development has long maintained that the limited capacity
to import in relation to high and inelastic capital imports requirements has been one of the
main factors responsible for the chronic inflation and stagnation in those countries.
Osman Suliman, (1996) "Economic Growth, Investment, and Exchange Rate Changes in a
PoorCapital Economy", Managerial Finance, Vol. 22 Iss: 5, pp.41 - 47

27 Dr. Andrea L. DeMaskey, (1995) "A Comparison of the Effectiveness of Currency Futures
and Currency Options in the Context of Foreign Exchange Risk Management" Exposure risk
managers can hedge exchange rate risk with either currency futures or currency options. It is
generally suggested that hedgers should choose a hedge instrument that matches the risk
profile of the underlying currency position as closely as possible. This advice, however,
ignores the possibility that the hedging effectiveness may differ for the alternate risk
management tools. This study compares the effectiveness of currency futures and currency
options as hedging instruments for covered and uncovered currency positions. Based on
Ederington's portfolio theory of hedging, the results show that currency futures provide the
more effective covered hedge, while currency options (used to construct a synthetic futures
contract) are more effective for an uncovered hedge. Hence, exposure risk managers do not
have to sacrifice hedging effectiveness to obtain the desired risk profile. Corporations
engaged in international business transactions are commonly exposed to exchange rate risk.
Since management is concerned with currency exposure, it can hedge the anticipated
exchange rate risk either with futures or options. The choice of the appropriate hedging tool is
generally influenced by the type of currency exposure (transaction, translation, or economic
risk), the size of the firm, the industry effect, the risk preference of the manager or the firm

and his/her familiarity with the available financial instruments and techniques. It is also
suggested that a hedger should choose a hedge instrument that matches the risk profile of the
underlying currency position as closely as possible. Hence, futures contracts are more
suitable for covered hedges, while option contracts are best used for uncovered hedges.
Hedging effectiveness of these two hedge instruments must be considered as well in order to
evaluate the cost of obtaining the desired risk profile. Some empirical research has shown
that the futures contract provides both an appropriate risk profile and a more effective hedge
than an options contract for covered positions. If these findings also hold for uncovered
currency positions, then the hedging decision involves a tradeoff between the desired risk
profile and hedging effectiveness. That is, a hedger would have to decide whether the extra
risk protection afforded by the attractive risk profile of options is worth the loss in hedging
performance. This study compares the hedging effectiveness of currency futures and currency
options for both covered and uncovered positions. Ederington's riskminimizing approach is
applied to estimate the hedging effectiveness and the least risk hedge ratios which, in turn, are
used to assess the tradeoff between risk profile and hedging performance.

Dr. Andrea L. DeMaskey, (1995) "A Comparison of the Effectiveness of Currency Futures
and Currency Options in the Context of Foreign Exchange Risk Management", Managerial
Finance, Vol. 21 Iss: 4, pp.40 - 51