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Inflation Risk, Hedging, and Exports

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  • Harald L. Battermann
  • Udo Broll

Abstract

This paper analyzes optimal production and hedging decisions of a risk‐averse exporting firm in a developing country. The firm cares about real profits, since the spot exchange rate and the domestic price level are uncertain. It is demonstrated that a separation property holds although there are two sources of risk and only one hedging instrument exists. The authors examine the optimal risk management of the firm. In contrast to most hedging models, the real risk premium is important for the optimal hedging strategy.

Suggested Citation

  • Harald L. Battermann & Udo Broll, 2001. "Inflation Risk, Hedging, and Exports," Review of Development Economics, Wiley Blackwell, vol. 5(3), pages 355-362, October.
    • Handle: RePEc:bla:rdevec:v:5:y:2001:i:3:p:355-362
    DOI: 10.1111/1467-9361.00128
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    Cited by:

    1. Koziol, Philipp, 2014. "Inflation and interest rate derivatives for FX risk management: Implications for exporting firms under real wealth," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(4), pages 459-472.
    2. Stefan Franz Schubert & Udo Broll, 2015. "Consumption, inflation risk and dynamic hedging," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 9(2), June.
    3. Broll, Udo & Wong, Kit Pong, 2014. "The impact of inflation risk on forward trading and production," Dresden Discussion Paper Series in Economics 02/14, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
    4. Udo Broll & Kit Wong, 2015. "The impact of inflation risk on forward trading and production," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 14(1), pages 65-73, December.
    5. Kit Wong, 2014. "Hedging and the competitive firm under correlated price and background risk," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 37(2), pages 329-340, October.

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