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Optimal Export And Hedging Decisions When Forward Markets Are Incomplete

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  • Kit Pong Wong

Abstract

This paper examines the behaviour of the competitive firm that exports to two foreign countries under multiple sources of exchange rate uncertainty. There is a forward market between the home currency and one foreign country's currency, but there are no hedging instruments directly related to the other foreign country's currency. We show that the separation theorem holds when the firm optimally exports to the foreign country with the currency forward market. The full‐hedging theorem holds either when the firm exports exclusively to the foreign country with the currency forward market or when the relevant spot exchange rates are independent. In the case that the relevant spot exchange rates are positively (negatively) correlated in the sense of regression dependence, the firm optimally opts for a short (long) forward position for cross‐hedging purposes.

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  • Kit Pong Wong, 2007. "Optimal Export And Hedging Decisions When Forward Markets Are Incomplete," Bulletin of Economic Research, Wiley Blackwell, vol. 59(1), pages 67-81, January.
    • Handle: RePEc:bla:buecrs:v:59:y:2007:i:1:p:67-81
    DOI: 10.1111/j.0307-3378.2007.00248.x
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    References listed on IDEAS

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    Cited by:

    1. Broll, Udo & Egozcue, Martín & Wong, Wing-Keung & Zitikis, Ričardas, 2010. "Prospect theory and hedging risks," Dresden Discussion Paper Series in Economics 05/10, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
    2. Zhao, Jieyuan & Goodwin, Barry K., 2012. "Dynamic Cross-Hedge Ratios: An Application of Copula Models," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124610, Agricultural and Applied Economics Association.
    3. Kit Pong Wong, 2015. "Export And Hedging Decisions Under Correlated Revenue And Exchange Rate Risk," Bulletin of Economic Research, Wiley Blackwell, vol. 67(4), pages 371-381, October.
    4. Broll, Udo & Wong, Kit Pong, 2015. "The incentive to trade under ambiguity aversion," The Journal of Economic Asymmetries, Elsevier, vol. 12(2), pages 190-196.

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