An Estimator for Risk Sharing Parameter : Operational Hedging a Transaction Currency Risk

Operational hedging techniques such as risk sharing, currency collars, and a hybrid arrangement can be used when transactions are subject to unexpected changes in the nominal exchange rate. These hedging devices utilise a risk sharing parameter and the market exchange rate of a currency pair. Negotiation over the former would be more straightforward if an exogenous threshold risk sharing parameter existed. This paper proposes such a parameter based on a generalized autoregressive conditionally heteroskedastic in the mean (GARCH-M) model. The existence of the estimated parameter might strengthen the bargaining position of the importer. The method might be particularly effective in cases where both invoicing and settlement are undertaken using a major currency