Multinationals and futures hedging: An optimal stopping approach

Rujing Meng and Kit Pong Wong

Global Finance Journal, 2010, vol. 21, issue 1, 13-25

Abstract: This paper examines the optimal design of a futures hedge program for a risk-averse multinational firm (MNF) under exchange rate uncertainty. All currency futures contracts are marked to market and require interim cash settlement of gains and losses. The MNF commits to prematurely liquidating its futures position on which the interim loss incurred exceeds a threshold level (i.e., the liquidation threshold). When the liquidation threshold is exogenously given, we show that the MNF optimally opts for an under-hedge (an over-hedge) should the futures exchange rates be not too (sufficiently) positively autocorrelated. When the liquidation threshold is endogenously determined, we show that the MNF voluntarily chooses to prematurely liquidate its futures position only if the futures exchange rates are positively autocorrelated. In the case that the futures exchange rates are uncorrelated or negatively autocorrelated, the MNF prefers not to commit to any finite liquidation thresholds.

Keywords: Futures; hedging; Multinationals; Optimal; stopping; problems (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:21:y:2010:i:1:p:13-25

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