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Cross‐Hedging Of Exchange Rate Risks: A Note

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  • HARALD L. BATTERMANN
  • UDO BROLL
  • KIT PONG WONG

Abstract

This note studies the optimal production and hedging decisions of a competitive international firm that exports to two foreign countries. The firm faces multiple sources of exchange rate uncertainty. Cross‐hedging is plausible in that one of the two foreign countries has a currency forward market. We show that the firm's optimal forward position is an over‐hedge, a full‐hedge or an under‐hedge, depending on whether the two random exchange rates are strongly positively correlated, uncorrelated or negatively correlated, respectively.

Suggested Citation

  • Harald L. Battermann & Udo Broll & Kit Pong Wong, 2006. "Cross‐Hedging Of Exchange Rate Risks: A Note," The Japanese Economic Review, Japanese Economic Association, vol. 57(3), pages 449-453, September.
    • Handle: RePEc:bla:jecrev:v:57:y:2006:i:3:p:449-453
    DOI: 10.1111/j.1468-5876.2006.00318.x
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    Cited by:

    1. Björn Döhring, 2008. "Hedging and invoicing strategies to reduce exchange rate exposure - a euro-area perspective," European Economy - Economic Papers 2008 - 2015 299, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.

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