Multiple Currencies and Hedging

Abstract

This paper presents a model of a competitive exporting firm confronting multiple currency risks. Future markets do not exist for the firm's own currency, but do exist between currencies of two countries to which the firm exports its entire output. We provide analytical insight into optimal cross-hedging and its implications on production and on trade flows. We show that the unbiasedness of the cross-currency futures market does not imply non-random profits. Furthermore, the availability of cross-hedging opportunities has no effects on production but does have effects on exports.

Modelling information and hedging: The exporting firm

“…This paper suggests a different notion of transparency for the financial market and analyzes its role for the decision problem of an exporting firm under exchange rate uncertainty. The risk averse exporting firm has access to a currency futures market where it can hedge its net exposure connected with its export (see, for example, Broll et al (1999), Wong (2003)). Prices and contracts traded on the currency forward market depend upon market transparency.…”

Export Production, Hedging Exchange Rate Risk: The Duopoly Case

“…In more recent studies these models have been expanded in various ways. For example Broll et al (1999b) examined the case in which the firm exports to two foreign markets and futures are only available between the foreign currencies. Wong (2003a) and(2003b) determined the case of currency options in different settings.…”

What to do if a dollar is not a dollar? The impact of inflation risk on production and risk management

“…Briys, Crouhy, and Schlesinger (1993) incorporate independent additive background risk. Cross hedging additive risks is discussed by Broll, Wahl, and Zilcha (1995), , Broll, Wong, and Zilcha (1999), Lence (1995), and others. Moschini and Lapan (1995) and Viaene and Zilcha (1998) analyze production risk.…”