 International trade and hedging under joint price and exchange rate uncertaintyKit Pong Wong International Review of Economics & Finance, 2013, vol. 27, issue C, 160-170 Abstract: This paper examines the behavior of a competitive exporting firm under joint price and exchange rate uncertainty. We show that the firm's optimal production and hedging decisions depend crucially on the degree of forward market incompleteness, and on the correlation structure of the price and exchange rate risk. The separation theorem holds if there are complete forward markets for hedging purposes. Should the forward markets be incomplete, the firm employs operational hedging by adjusting its output so as to better cope with the residual risk that is unhedgeable by simply trading the existing forward contracts. In the case that the price risk cannot be directly managed by financial hedging, we construct a reasonable example in which the firm optimally produces more, not less, than the benchmark output level under perfect hedging. Our results thus offer new insights into the interaction between financial and operational hedging in the context of multiple sources of uncertainty. Keywords: Exchange rate risk; Hedging; Price risk; Production (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:27:y:2013:i:c:p:160-170 DOI: 10.1016/j.iref.2012.09.013 Access Statistics for this article International Review of Economics & Finance is currently edited by H. Beladi and C. Chen More articles in International Review of Economics & Finance from Elsevier |
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