Multiple currencies and cross hedging
The paper derives optimal cross hedging and production rules for an exporting firm which faces multiple exchange rate risks. We study the impact of currency cross hedging upon the firm's export production for two countries. We demonstrate that when the forward market for cross hedging is unbiased there is a full hedge. However, the profits remain stochastic. The cross hedge reduces uncertainty about the producer's income except that part which is unhedgeable. Furthermore we show that introducing an unbiased forward market for a crosscurrency hedging will not affect the firm's total production level, even though it will increase the export to one of the two countries. This is in contrast to the usual impact which unbiased forward market has upon the risk-averse firm's production.
|Date of creation:||1995|
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- Ware, Roger & Winter, Ralph, 1988. "Forward markets, currency options and the hedging of foreign exchange risk," Journal of International Economics, Elsevier, vol. 25(3-4), pages 291-302, November.
- Grobar, Lisa Morris, 1993. "The effect of real exchange rate uncertainty on LDC manufactured exports," Journal of Development Economics, Elsevier, vol. 41(2), pages 367-376, August.
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