Assessment of Effectiveness of foreign currency future Hedging in India

Abstract

Through an analysis of four main international currencies—the US dollar, euro, Japanese yen, and
British pounds—against the Indian rupee, the research study assesses the effectiveness of hedging in
India's foreign exchange futures market. The research attempts to quantify how well futures contracts
mitigate currency risk by examining the relationship between price changes in the spot and futures
markets. The study uses a variety of econometric techniques, such as the ADF test for stationarity, the
Johansen Cointegration Test for long-term relationships, and the computation of Optimal Hedge Ratios
for identifying effective hedge positions, using daily spot and futures price data over a five-year period
(2019–2023). Hedging efficiency is further assessed to quantify how well futures markets offset risk in
the spot market. The major findings offer insights into the comparative performance of currency futures
for USD, EUR, JPY, and GBP, contributing to the understanding of currency risk management in the
Indian financial markets and enhancing market participants in making informed hedging decisions.