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Over the hedge? Exporters' optimal and selective hedging choices

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How do exporting firms manage currency exposures? We examine this issue at the firm level using comprehensive data from the prototype Longitudinal Business Database recently developed by Statistics New Zealand. We use these data to test both optimal and selective hedging theories. Optimal hedging theory hypothesises that firms hedging choices depend on the probability and cost of financial distress, underinvestment risks, scale, managerial risk aversion, information asymmetry, governance, ownership structures and tax rules. Recent literature suggests that some firms vary hedging positions relative to their optimal position in a selective attempt to beat the market . We examine whether hedging behaviour is consistent with hypotheses derived from optimal hedging theories, and test whether hedging positions change (possibly sub-optimally) when the NZD/AUD is perceived to be high or low relative to an historical average. Optimal and selective hedging theories are both supported by the data. Estimation is over July 2000 to March 2007 (monthly) a period during which the NZD/AUD varied substantially, making this a particularly pertinent period to test exporters currency risk management practices. Classification-D21, F31, G15

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  • Richard Fabling & Arthur Grimes, 2008. "Over the hedge? Exporters' optimal and selective hedging choices," Reserve Bank of New Zealand Discussion Paper Series DP2008/14, Reserve Bank of New Zealand.
    • Handle: RePEc:nzb:nzbdps:2008/14
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    File URL: http://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Discussion%20papers/2008/dp08-14.pdf
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    Cited by:

    1. Richard Fabling & Lynda Sanderson, 2015. "Export Performance, Invoice Currency and Heterogeneous Exchange Rate Pass-through," The World Economy, Wiley Blackwell, vol. 38(2), pages 315-339, February.
    2. Richard Fabling & Lynda Sanderson, 2010. "Entrepreneurship and aggregate merchandise trade growth in New Zealand," Journal of International Entrepreneurship, Springer, vol. 8(2), pages 182-199, June.
    3. Enzo Cassino & David Oxley, 2013. "How Does the Exchange Rate Affect the Real Economy? A Literature Survey," Treasury Working Paper Series 13/26, New Zealand Treasury.

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