Exchange Rate Determinants & Exchange Rate Risk Hedging: An Empirical Study Applied on the Case of a Tunisian Company

Abstract

The aim of this paper is to propose an appropriate method that could assist decision-makers in the finance department responsible for hedging against the exchange risk yielding a better strategy to shield the company from the undesired scenarios of loss. Our research interrogation related to an intelligent solution devoted to the minimization of the currency risk incurred by our Tunisian studied Holding when trading on the foreign exchange market. The study focused on the four most involved currencies in the Tunisian and Foreign trading market: USD, EUR, GBP, and JPY. Our sampling period runs from January 03, 2011 to June 30, 2021. First, the results suggest that the key interest rate and the foreign exchange reserves are most determinant variables compared to the other variables. Second, we present a feasible procedure to hedge against currency risk consisting of five steps, through a developed Artificial Intelligence based program, a correlation analysis and the Temporal Causality Model. Finally, we create our different hedging scenarios and the desired exchange rate is forecasted for a period (from 1 month to 12 months). Based on the forecasted exchange rate values, the studied Holding is able to conclude the most advantageous forward hedging contract by choosing the term of the contract at which the exchange rate level is the most profitable rate according to its position in the market.