Corporate Hedging of Exchange Risk When Foreign Currency Cash Flow Is Uncertain

Bhagwan Chowdhry
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Bhagwan Chowdhry: Anderson Graduate School of Management at UCLA, 405 Hilgard Avenue, Los Angeles, California 90024-1481

Management Science, 1995, vol. 41, issue 6, 1083-1090

Abstract: We analyze hedging policies for a corporation that generates a foreign currency cash flow that is not known with certainty. We obtain an intriguing result that the probability of bankruptcy for a firm that attempts to minimize this probability is lower when there is some uncertainty in the exchange rates than when there is no uncertainty in the exchange rates: the firm reduces the probability of bankruptcy by borrowing more than its financing needs through foreign currency borrowing alone and by investing the excess funds in domestic risk-free securities.

Keywords: hedging; exchange risk; corporate risk management; inflation uncertainty (search for similar items in EconPapers)
Date: 1995
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:41:y:1995:i:6:p:1083-1090

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