Cross-Hedging of Exchange Rate Risks: A Note*

Battermann, Harald L.; Бролл, Удо; Wong, Kit Pong

doi:10.1111/j.1468-5876.2006.00318.x

Cited by 3 publications

(3 citation statements)

References 14 publications

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“…In the more interesting case wherein the firm exports to both foreign countries, we show that the firm's optimal forward position is an overhedge or an under-hedge, depending on whether the two random exchange rates are positively or negatively correlated in the sense of expectation dependence (Wright, 1987). Our results thus refine those of Battermann et al (2006) by introducing the expectation dependence structure to describe the multiple sources of exchange rate uncertainty.…”

Section: Introductionsupporting

confidence: 54%

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Cross-Hedging of Correlated Exchange Rates

Бролл¹,

Wong

2011

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. This paper examines the behavior of a competitive exporting firm that exports to two foreign countries under multiple sources of exchange rate uncertainty. The firm has to cross-hedge its exchange rate risk exposure because there is only a forward market between the domestic currency and one foreign country's currency. When the firm optimally exports to both foreign countries, we show that the firm's production decision is independent of the firm's risk attitude and of the underlying exchange rate uncertainty. We show further that the firm's optimal forward position is an over-hedge or an under-hedge, depending on whether the two random exchange rates are positively or negatively correlated in the sense of expectation dependence. Terms of use: Documents inJEL-Classification: D21; D24; D81; F31Keywords: Correlated exchange rates; Cross-hedging; Exports; Production Cross-Hedging of Correlated Exchange Rates AbstractThis paper examines the behavior of a competitive exporting firm that exports to two foreign countries under multiple sources of exchange rate uncertainty. The firm has to cross-hedge its exchange rate risk exposure because there is only a forward market between the domestic currency and one foreign country's currency. When the firm optimally exports to both foreign countries, we show that the firm's production decision is independent of the firm's risk attitude and of the underlying exchange rate uncertainty. We show further that the firm's optimal forward position is an overhedge or an under-hedge, depending on whether the two random exchange rates are positively or negatively correlated in the sense of expectation dependence.

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Section: Introductionsupporting

confidence: 54%

“…Following the expected utility model of Battermann et al (2006), we consider the firm that exports to two foreign countries under multiple sources of exchange rate uncertainty. There are no hedging instruments between the domestic currency and one foreign country's currency.…”

Section: Introductionmentioning

confidence: 99%

Cross-Hedging of Correlated Exchange Rates

Бролл¹,

Wong

2011

SSRN Journal

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“…Indeed, currency forward markets are typically absent in many less-developed countries, and are just starting to develop at a rather slow pace in many of the newly industrialized countries in Latin America and Asia Pacific (see Eiteman, Stonehill, & Moffett, 2009). 2 International firms that are exposed to currencies of these countries thus have to avail themselves of forward contracts on related currencies to cross hedge their exchange rate risk exposure (see, e.g., Adam-Müller & Nolte, 2011;Anderson & Danthine, 1981;Broll, 1997;Broll & Eckwert, 1996;Broll, Wong, & Zilcha, 1999;Battermann, Broll, & Wong, 2006;Chang & Wong, 2003;Eaker & Grant, 1987).…”

Section: Introductionmentioning

confidence: 99%

Cross Hedging with Currency Forward Contracts

Wong

2012

Journal of Futures Markets

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This study examines the behavior of a competitive exporting firm that exports to a foreign country and faces multiple sources of exchange rate uncertainty. Although there are no hedging instruments between the home and foreign currencies, there is a third country that has well‐developed currency forward markets to which the firm has access. The firm's optimal cross‐hedging decision is shown to depend both on the degree of incompleteness of the currency forward markets in the third country, and on the correlation structure of the random spot exchange rates. Furthermore, the firm is shown to be more eager to produce and expand its exports to the foreign country when the missing currency forward contracts between the home and foreign currencies can be synthesized by the existing currency forward contracts. In this case of perfect cross hedging, the separation theorem holds but the full‐hedging theorem may or may not hold. © 2012 Wiley Periodicals, Inc. Jrl Fut Mark

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The sensitivity of GCC firms’ stock returns to exchange rate, interest rate, and oil price volatility

Alenezi

Alqatan

Phiri

2020

COC

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This study seeks to investigate the sensitivity of stock returns to exchange rate, interest rate and oil price volatility in the Gulf Cooperation Council (GCC) countries. It employs both the multivariate ordinary least square (OLS) regression and the exponential generalized autoregressive conditional heteroscedastic in mean (EGARCH-M) models to analyse the data collected from Bloomberg and DataStream on the GCC countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) for the period January 2007 to June 2012. The study shows that stock returns in GCC countries are influenced by the exchange rate risk, interest rate risk and oil price risk. However, the exposure is highest for exchange rate risk and lowest for interest rate risk. While the effects of these risks were mixed, overall, exchange rate risk and oil price risk showed a positive and significant relationship as compared to the interest rate risk that showed a negative significant effect on firm values. The level of the effect of these risks also differed from country to country. Further, foreign operations and firm size had a significant influence on the extent of the firms’ exposure to all three risks. The study findings suggest that the volatility of stock returns affected by changes in the risk factors could indicate non-prioritisation of risk management by firms. This has implications in terms of consideration of the long-term exposure of firms to these three risks and thus, the need for effective risk management strategies.

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Cross-Hedging of Exchange Rate Risks: A Note*

Cited by 3 publications

References 14 publications

Cross-Hedging of Correlated Exchange Rates

Cross-Hedging of Correlated Exchange Rates

Cross Hedging with Currency Forward Contracts

The sensitivity of GCC firms’ stock returns to exchange rate, interest rate, and oil price volatility

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