The hedging effectiveness of newly introduced yen currency futures contract

Despite of regional closeness and active trading between Korea and Japan, there is little empirical analysis on the foreign exchange risk of Korean won and Japanese yen. Recently, the Korea Exchange (KRX) has introduced a Japanese yen currency futures contract. The main objective of this study is to examine the hedging performance of this foreign exchange hedging tool. This study sets up a theoretical framework for capital investment hedging schemes with direct and cross hedge types. According to the simulation results, the 1:1 na˜‡ve and the minimum variance hedge strategies outperform no-hedge strategy. With respect to risk reduction, the minimum variance hedge is considered to be marginally superior to the 1:1 na˜‡ve hedge. More importantly, the hedging performances of direct hedge strategies prove to be even better than those of cross hedge strategies. The difierences in the hedging performances between direct and cross hedges would be regarded as the efiects of introducing Japanese yen currency futures contract.