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Short- and Long-term Hedging for the Corporation

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  • Dumas, Bernard J

Abstract

Exchange risk hedging in a static (i.e. one-period) setting is extremely straightforward. The variance-minimizing hedge of a particular future cash flow involves a forward contract equal but opposite in sign to the exposure of the cash flow. The exposure is the regression coefficient of the cash flow on the exchange rate. In a multi-period setting, the matter is much less straightforward. Information concerning a future cash flow evolves over time. For that reason, a hedge undertaken early on may have to be revised several times. These revisions themselves increase the level of risk. In this paper I explore the case for deliberately leaving a cash flow unhedged for some time, initiating a hedge at some appropriate time and thereafter, perhaps, leaving the hedge untouched until the cash flow is received or paid. The precise mathematical theory in support of this idea has yet to be developed.

Suggested Citation

  • Dumas, Bernard J, 1994. "Short- and Long-term Hedging for the Corporation," CEPR Discussion Papers 1083, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1083
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    Cited by:

    1. Friberg, Richard & Nydahl, Stefan, 1997. "Openness and the exchange rate exposure of national stock markets - a note," SSE/EFI Working Paper Series in Economics and Finance 195, Stockholm School of Economics.

    More about this item

    Keywords

    Corporations; Exchange Risks; Floating Exchange Rate; Hedging; International Trade;

    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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