Cross-hedging commodity currencies: Australia and Papua New Guinea

There has been little evidence to support the use of commodity-currency cross-hedges (Demaskey and Pearce, 1998; Benet, 1990; Eaker and Grant, 1987). However, this paper shows that if currencies can be defined as commodity currencies, as per Chen and Rogoff (2003) and Cashin, spedes and Sahay (2002), commoditycurrency cross-hedges are effective and beneficial. Two commodity currencies, the Papua New Guinea kina and the Australian dollar, are shown here to be effectively hedged by commodity futures. Multiple commodity hedges generally improved performance, with four-commodity basket hedges effective for both currencies. The author wishes to thank Satish Chand for input throughout the development of this paper. This paper was funded by an AusAID research grant. The opinions expressed here are those of the author and do not represent those of AusAID or the Commonwealth of Australia. ∗ Chakriya Bowman JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200 AUSTRALIA Tel: +61 2 6125 6556 email: [email protected] Cross-hedging commodity currencies: Australia and Papua New Guinea Chakriya Bowman