I would like to thank Axel Adam-Müller, Udo Broll, Gabriel Talmain (Editor-in-Charge), three anonymous referees, and seminar participants at the Shanghai University of Finance and Economics for their helpful comments and suggestions. The usual disclaimer applies.
EXPORT AND HEDGING DECISIONS UNDER CORRELATED REVENUE AND EXCHANGE RATE RISK
Article first published online: 20 NOV 2013
© 2013 Board of Trustees of the Bulletin of Economic Research and John Wiley & Sons Ltd
Bulletin of Economic Research
How to Cite
Wong, K. P. (2013), EXPORT AND HEDGING DECISIONS UNDER CORRELATED REVENUE AND EXCHANGE RATE RISK. Bulletin of Economic Research. doi: 10.1111/boer.12016
- Article first published online: 20 NOV 2013
- futures hedging;
- multiple sources of uncertainty;
This paper examines the behaviour of a competitive exporting firm under joint revenue and exchange rate risk. The firm can trade unbiased currency futures contracts for hedging purposes. We show that neither the separation theorem nor the full-hedging theorem holds when the revenue shock prevails. If the correlation between the revenue shock and the random spot exchange rate is non-positive, the firm optimally produces less than the benchmark level when the revenue shock is absent. If, in addition, the firm is prudent, the optimal futures position is an under-hedge. Finally, we derive sufficient conditions under which the firm's optimal output level is higher in the presence than in the absence of the revenue shock. Operational hedging and financial hedging as such interact in a complicated way to better cope with the multiple sources of uncertainty faced by the firm.