Exchange Rate Risk, Export and Hedging

Udo Broll ()

International Journal of Finance & Economics, 1997, vol. 2, issue 2, 145-50

Abstract: In an intertemporal model the impact of exchange rate risk on an international firm is studied under the assumption that no forward markets are existing in the foreign currency. However, there is a forward traded financial asset, whose spot price is highly correlated with the random spot exchange rate, i.e. regressable on it. The direction of regression for spot and futures prices turns out to be important when the effects of cross hedging are analysed. It is shown that the exporting firm underhedges if the futures market is unbiased. Furthermore, it is demonstrated that the separation property does not hold, i.e. export production and financial decisions cannot be separated from expectations and risk behaviour. Copyright @ 1997 by John Wiley & Sons, Ltd. All rights reserved.

Date: 1997
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