Evaluating Expert Decision Systems for Exchange Rate Insurance

Global trade volumes and globalization hitting records every year imply growth of commercial operations among more companies each time and inevitable dealing with exchange rate risk. As an established practice, some enterprises make payments in a timeframe agreed to in a commercial contract. Therefore, the risks of the exchange rate changing unfavorably for a buyer is elevated. As a consequence, many companies decide to hedge their transactions by using various bank products such as forward and option contracts or exchange rate insurance which in turn imply extra expenses. This paper aims to reduce expenses of hedging by designing an expert decision system that works on a set of rules and decides whether it is necessary to hedge a commercial operation. The expert decision system facilitates daily recommendations to a company on the decision of exchange rate hedging. The contribution of this research is twofold. First, it applies the latest machine learning techniques and obtains around 79% of accuracy on predicting the following day’s exchange rate trend. Second, it designs an expert decision system that helps a company to reduce its expenses of managing foreign exchange exposure. The results of backtesting on real data proves efficiency of the expert decision system