A simulation exercise is conducted to find out if the profitability of forecasting-based currency trading is more related to the ability of the underlying model to predict the direction of change than the magnitude of the forecasting error. Theoretical considerations show that a correct...

An attempt is made to verify the exchange rate regime that China has been following since 21 July 2005 when a policy shift was implemented, presumably taking China from a dollar peg to a basket peg. The results show that while a regime of simple and strict dollar peg has indeed been abandoned,...

Six currency combinations are used to study the comparative profitability of carry trade and a forecasting-based strategy. The results show that the forecasting-based strategy outperforms straight carry trade in terms of return and risk-adjusted return. The implication of these results is that...

Arguments are put forward to challenge the case for a trade war between the U.S. and China. The threat of a trade war against China is based on three pillars: (i) the Chinese currency is undervalued, (ii) undervaluation of the yuan is the cause of and cure for the U.S. massive trade deficit, and...

This paper presents a critique of the theoretical and empirical work on the PPP hypothesis since it was formalised by Cassel early this century. Two issues are addressed: the distinction between absolute and relative PPP, and between short-run and long-run PPP. It is argued that the distinction...

The main argument put forward in this paper is that a currency board is the optimal exchange rate regime for Iraq under the present conditions. The main alternative of managed floating is ruled out as being inappropriate. It is also argued that the exchange rate regime in the case of Iraq should...

Although covered interest parity (CIP) can be derived as an arbitrage or a hedging condition in the absence of the bid-offer spreads, the arbitrage condition collapses when the spreads are introduced. It is shown that CIP is better described as a hedging condition, which means that it cannot be...

In this paper it is demonstrated that the operational hedging techniques of risk sharing and currency collars can be as effective as forward hedging in reducing transaction exposure to foreign exchange risk. For this purpose we use historical data on the exchange rates of the Kuwaiti dinar...

We test the proposition that international diversification is effective in reducing risk. The traditional underlying argument is that low correlations of international stock returns make the variance of an international portfolio lower than the variance of a purely domestic portfolio when long...

A hybrid operational hedging technique is proposed to shift some of the foreign exchange risk from the importer to the exporter when the currency of invoicing is the base currency of the exporter. This requires the conversion of the cash flows at a range of exchange rates calculated as some...