Hedging and Nonlinear Risk Exposure
AbstractThis paper documents some empirical evidence of nonlinear spot-futures exchange rates relationships and develops an expected utility model of an exporting firm to examine the associated economic implications. The model shows that the firm should export more (less) and adopt an over (under) hedge in an unbiased currency futures market if the spot-futures exchange rates relationships is convex (concave) rather than linear. When fairly priced currency options on futures are available, the firm should use them in conjunction with the currency futures so as to achieve better hedging against its nonlinear exchange rate risk exposure. This provides a rationale for the hedging role of options when the underlying uncertainty is nonlinear in nature. Copyright 2001 by Oxford University Press.
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Bibliographic InfoArticle provided by Oxford University Press in its journal Oxford Economic Papers.
Volume (Year): 53 (2001)
Issue (Month): 2 (April)
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- Broll, Udo & Eckwert, Bernhard, 2011. "Information value, export and hedging," Dresden Discussion Paper Series in Economics 03/11, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
- Udo Broll & Kit Wong, 2010. "Banking firm and hedging over the business cycle," Portuguese Economic Journal, Springer, vol. 9(1), pages 29-33, April.
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- Aysun, Uluc & Guldi, Melanie, 2011.
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Elsevier, vol. 12(4), pages 321-337.
- Gilroy, Bernard Michael & Broll, Udo, 2005. "Managing Credit Risk with Credit Derivatives," MPRA Paper 17678, University Library of Munich, Germany.
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