Strategies for Minimizing Monetary Loss in the Department of Defense Budget Through Use of Financial Derivatives

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The purpose of this research was to examine whether it would be in the best interest of the Department of Defense to consider using currency hedging as a way to protect its budget from negative currency fluctuations in the US Dollar. Specifically, the use of futures and options contracts was examined. Overseas expenditure data was collected on the YEN and the EURO for Fiscal Years 2001 to 2007 and cross-referenced with the contract prices for the aforementioned hedges during the same period of time. Using an ex post facto analysis with the gathered data, the results show that hedging with futures or call options on the USD/EURO would have provided a tremendous overall savings to the DOD. Currently the DOD does not hedge its budget against currency fluctuation. The implication from this study is that the DOD should consider hedging its currency exposure and examine whether other methodologies might be more appropriate with other currencies or in other circumstances.