Creating a decision framework for managing an EUR/USD exposure using system dynamics and scenario planning.

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This master thesis aims to provide a decision framework for financial decision-makers who are managing a large EUR/USD exposure. The EUR/USD market involves a high degree of uncertainty, which makes the decision-making process of finding a appropriate hedging strategy difficult. This study provides insights in how to deal with this uncertainty and what the financial impact is of a EUR/USD fluctuation on the most important financial figures. This research started from a qualitative constructed system dynamics model based on the existing literature and insights from the researcher. The results of this model shown that there are multiple feedback loops in this system that influence the behaviour of the system (currency risk). Two important feedback loops present in this model involves the hedging of the currency risk via external hedging instruments, which causes an balancing as well as an reinforcing effect in this system. To ultimately improve the decision-making process an interactive dashboard is built in this study where financial decision-makers can find an robust strategy regarding different EUR/USD scenarios, in line with step 2 of the robust decision-making framework of Marchau et al. (2019). Results of this interactive dashboard shows a robust strategy involves a mixed strategy of two external hedging instruments (spots and options) to benefit from an increase of the EUR/USD rate and protected from a decrease of the EUR/USD rate and thus potential losses. This research also concludes that a few business characteristics such as percentage profit margin, international activity and diversification of markets partly determines the degree of sensitivity to the EUR/USD rate.
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