Foreign Currencies in Thailand

Hedging and the Need to Hedge Forward Currency Exchange Rates

Hedging is an action or a series of actions taken by either a buyer or a seller to protect assets against a change in prices (Rees, 1991, p. 210). In practical applications, the concept of hedging works much like the concept of arbitrage.

William Sharpe (1991, p. 569) noted that, when two race horse enthusiasts bet with one another, the activity is termed gambling, and a risk has been created where none existed before the bet was made. When the owner of a horse in a race makes a bet on another horse in the same race, however, the situation is different, with respect to risk. In this latter instance, risk has been reduced through the application of hedging. In the race, if the owner's horse wins, prize money will be collected by the owner, and the amount of money bet on the other (and losing) horse will be lost. If the owner's horse loses, the owner will receive nothing in the way of prize money, but will receive the payoff on the bet on the other (and winning) horse. By betting on another horse in the same race, the owner has

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diversify their holdings among a number of currencies, as a means of reducing risks (Backus, 1983, pp. 830833). In actual practice, there are several portfolio balance model versions (Engel and Flood, 1985, pp. 312313). All of the versions are based on the same underlying theory. The differences are found in the varying ways in which prices are treated. The PFBM recognizes that a current account deficit for a country can persist over an extended period of time, as long as the amount of a currency being supplied through a current account deficit is equal to the quantities of that currency being demanded by international investors (Humpage and Karamouzis, 1986, p. 3). Problems in the application of the portfolio balance model arise in the projection of asset holding preferences (Hooper and Morton, 1982, pp. 4244). It is one thing to recognize that asset holding preferences affect currency exchange rates. It is quite another, however, to make accurate predictions of what these preferences will be, and how long they will persist. Applications of the PFBM model place great reliance on the theory of rational expectations (Engel and Flood, 1985, pp. 312313). Rational expectations the
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Some common words found in the essay are:
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Approximate Word count = 6388
Approximate Pages = 26 (250 words per page)

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