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Optimal Currency Hedging, Export, and Production in the Presence of Idiosyncratic Risk

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  • Axel F. A. Adam-Müller

Abstract

This paper analyzes the behavior of a risk-averse exporting firm facing exchange rate uncertainty in the presence of forward markets. The existing literature on optimal hedging and production rules is extended by allowing for idiosyncratic risk. The paper provides an application of recent concepts in expected utility theory concerning optimal decisions in the presence of more than one risk (prudence, precautionary premium). Important results (separation theorem, full hedging theorem) still hold, but optimal speculative positions are smaller due to the existence of idiosyncratic risk.

Suggested Citation

  • Axel F. A. Adam-Müller, 1993. "Optimal Currency Hedging, Export, and Production in the Presence of Idiosyncratic Risk," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 129(II), pages 197-208, June.
  • Handle: RePEc:ses:arsjes:1993-ii-5
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    Cited by:

    1. Adam-Muller, Axel F. A., 1997. "Export and hedging decisions under revenue and exchange rate risk: A note," European Economic Review, Elsevier, vol. 41(7), pages 1421-1426, July.
    2. Adam-Müller, Axel F. A., 1999. "Hedging Price Risk When Real Wealth Matters," CoFE Discussion Papers 99/12, University of Konstanz, Center of Finance and Econometrics (CoFE).
    3. Adam-Muller, Axel F. A., 2000. "Hedging price risk when real wealth matters," Journal of International Money and Finance, Elsevier, vol. 19(4), pages 549-560, August.

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