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Article

Behavioral Pattern of Emerging Asia Currency
Option Risk Reversals: An Indicator
for Foreign Exchange Hedging

Suresh Ramanathan and Kian Teng
The Journal of Trading Spring 2014, 9 (2) 27-38; DOI: https://doi.org/10.3905/jot.2014.9.2.027
Suresh Ramanathan
is a doctoral candidate in economics at the University of Malaya in Kuala Lumpur, Malaysia. skrasta70@hotmail.com
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Kian Teng
is an associate professor of economics at the University of Malaya in Kuala Lumpur, Malaysia. ktkwek@um.edu.my
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Abstract

By identifying Emerging Asia currency option risk reversal as a behavioral variable, we find the influence of currency spot return and carry return has significant bearing in hedging patterns of foreign exchange market participants. We note that appreciation of Emerging Asia currencies in the foreign exchange spot market as well as increased carry return tend to mislead foreign exchange market participants from fully hedging their trading exposure in Emerging Asia currencies, which were notable in all 10 currencies that were analyzed, with the exception of the Chinese yuan. In the case of the Chinese yuan, foreign exchange market participants were fully hedged against changes in the currency spot return and carry return. In this study, the influence of hedging patterns was identified by using the outlying factor as a barometer in modelling hedging patterns of foreign exchange market participants, as well the correlation among currency option risk reversals, currency spot return, and carry return.

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The Journal of Trading: 9 (2)
The Journal of Trading
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Spring 2014
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Behavioral Pattern of Emerging Asia Currency
Option Risk Reversals: An Indicator
for Foreign Exchange Hedging
Suresh Ramanathan, Kian Teng
The Journal of Trading Mar 2014, 9 (2) 27-38; DOI: 10.3905/jot.2014.9.2.027

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Behavioral Pattern of Emerging Asia Currency
Option Risk Reversals: An Indicator
for Foreign Exchange Hedging
Suresh Ramanathan, Kian Teng
The Journal of Trading Mar 2014, 9 (2) 27-38; DOI: 10.3905/jot.2014.9.2.027
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