How solve the minor currency exposure

1. Cross-hedging minor currency
exposure
MURSHID E
17351034

2. Minor currency
 The major currencies are the: U.S. dollar, Canadian
dollar, British pound, Euro, Swiss franc, Mexican peso,
and Japanese yen.
 Everything else is a minor currency, like the Thai bhat.

3.  If a firm has receivables or payables with in major
currency such as british pound, euro, or japanese yen, it
can easily use forward, money market or option contract
to manage the exchange risk exposure.
 If the firm has positions in minor currencies such as
korean won, thai bhat, or czech koruna, it may be
either very costly or impossible to use financial
contracts in these currencies.

4.  This is because financial markets of developing
countries are relatively underdeveloped and often
highly regulated.
 Facing this situation, the firm may consider using
cross-hedging techniques to manage its minor
currency exposure.
 Cross-hedging involve hedging a position in one
asset by taking a position another asset.
 The effectiveness of cross-hedging depends upon
how well the assets are correlated.

5. example;
Suppose a Canadian firm has an account
receivable in Korean won and would like to hedge
its won position. If there were a well-functioning
forward market in won, the firm would simply sell
the won receivable forward. But the firm finds it
impossible to do so.

6. However, since the won/Canadian dollar exchange
rate is highly correlated with the yen/dollar
exchange rate, the Canadian firm may sell a yen
amount, which is equivalent to the won receivable,
forward against the Canadian dollar thereby cross-
hedging its won exposure. Obviously, the
effectiveness of this cross-hedging technique would
depend on the stability and strength of the won/yen
correlation.