The author thanks Axel Adam-Müller, Udo Broll, James Vere, Bob Webb (the editor), and an anonymous referee for their helpful comments and suggestions. The usual disclaimer applies.
Cross Hedging with Currency Forward Contracts
Article first published online: 15 MAY 2012
© 2012 Wiley Periodicals, Inc.
Journal of Futures Markets
Volume 33, Issue 7, pages 653–674, July 2013
How to Cite
Wong, K. P. (2013), Cross Hedging with Currency Forward Contracts. J. Fut. Mark., 33: 653–674. doi: 10.1002/fut.21561
- Issue published online: 19 APR 2013
- Article first published online: 15 MAY 2012
- Manuscript Accepted: 23 MAR 2012
- Manuscript Received: 17 OCT 2011
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