CROSS‐HEDGING OF EXCHANGE RATE RISKS: A NOTE*

Harald L. Battermann, Udo Broll and Kit Pong Wong

The Japanese Economic Review, 2006, vol. 57, issue 3, 449-453

Abstract: This note studies the optimal production and hedging decisions of a competitive international firm that exports to two foreign countries. The firm faces multiple sources of exchange rate uncertainty. Cross‐hedging is plausible in that one of the two foreign countries has a currency forward market. We show that the firm's optimal forward position is an over‐hedge, a full‐hedge or an under‐hedge, depending on whether the two random exchange rates are strongly positively correlated, uncorrelated or negatively correlated, respectively.

Date: 2006
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