Foreign exchange risk management with hedging – DND counterfactual hedge results 2009-2013

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Authors
  1. Maybury, D.W.
Corporate Authors
Defence R&D Canada - Centre for Operational Research and Analysis, Ottawa ON (CAN)
Abstract
Using foreign exchange transaction data from eight Department of Defence (DND) managed projects from fiscal year 2009 to fiscal year 2013, we counterfactually apply four derivative based hedging scenarios to mitigate foreign exchange transaction risk. The total foreign currency exposure represented by the eight projects amounts to $3 billion USD. We focus the study on zero cost structures for hedge performance comparison. Over the five fiscal years considered, we find that the hedge performs within 3% of spot purchases, but the hedge comes with a maximum cost for the US dollar within each fiscal year. If DND can translate the more stable cash flows that a foreign exchange hedge offers into better management, then a foreign exchange hedge can help DND increase the value of national defence offered to Canada.

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Report Number
DRDC-CORA-TM-2013-205 — Techincal Memorandum
Date of publication
01 Dec 2013
Number of Pages
36
DSTKIM No
CA038338
CANDIS No
538459
Format(s):
Electronic Document(PDF)

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