Analysis of Sterling-HKD Exchange Rate Fluctuations and the Role of Forward Contracts

DOI: https://doi.org/10.62517/jse.202411108

Author(s)

Lu Hongyu

Affiliation(s)

Hong Kong Metropolitan University, Hong Kong, China

Abstract

In the increasingly globalized financial landscape, the challenge of mitigating foreign exchange risks becomes paramount for investors. This research delves into the efficacy of forward contracts as a strategic tool to hedge against such risks, with a focus on the Sterling-HKD exchange rate fluctuations. Utilizing data and a comprehensive case study of a HK-based investment firm, this paper delineates both the advantages and potential challenges of employing forward contracts in investment portfolios. Our findings underscore the tangible benefits of forward contracts in shielding investments from volatile currency shifts. However, it is imperative for investors to be cognizant of the associated pitfalls. Through a comparative lens with existing literature, this paper offers invaluable insights and pragmatic recommendations for investors operating in tumultuous foreign exchange markets.

Keywords

Foreign Exchange Risk; Hedging; Forward Contracts

References

[1] Forward Contracts vs. Futures Contracts: What’s the Difference? (2023, February 7). Investopedia. https://www.investopedia.com/ask/answers/06/forwardsandfutures.asp [2] Forward Contract vs Futures Contract - Difference and Comparison | Diffen. (n.d.). Forward Contract Vs Futures Contract - Difference and Comparison | Diffen. https://www.diffen.com/difference/Forward_Contract_vs_Futures_Contract