Export under risk and expectation dependence

Udo Broll, Matthias Pelster and Pong Wong Kit

No 02/21, CEPIE Working Papers from Technische Universität Dresden, Center of Public and International Economics (CEPIE)

Abstract: Abstracting from self-protection and self-insurance e ects of export produc-tion choices, exporting rms usually have access to a number of risk sharingmarkets that have an efficient risk management role. Two of the most strikingresults achieved from the existence of risk sharing markets are the separationtheorem and the and full-hedging theorem. This note examines the optimalproduction for exports and hedging decisions of a risk-averse rm facing bothhedgeable exchange rate risk and non-hedgeable (background) risk. While theseparation property holds in this context, the full-hedging property does not.The correlation between the non-hedgeable income risk and the hedgeableforeign exchange rate risk is pivotal We show that the concept of expectationdependence is useful in determining the optimal nancial risk management.

Keywords: Export; Background Risk; Exchange Rate Risk; Expectation Dependence; Hedging; Hintergrundrisiko; Wechselkursrisiko; Erwartungsabhängigkeit; Absicherung (search for similar items in EconPapers)
JEL-codes: D81 D84 F11 F30 F31 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-rmg and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tudcep:0221

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