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Exchange Rate Risk, Export and Hedging
Author(s) -
Broll Udo
Publication year - 1997
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/(sici)1099-1158(199704)2:2<145::aid-jfe37>3.0.co;2-v
Subject(s) - futures contract , economics , foreign exchange risk , spot contract , exchange rate , forward market , currency , financial economics , risk premium , foreign exchange , asset (computer security) , spot market , financial market , capital asset pricing model , foreign exchange market , forward rate , monetary economics , interest rate , finance , electricity , computer security , electrical engineering , computer science , engineering
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. © 1997 John Wiley & Sons, Ltd.