Hedging of exchange rate risk and regression dependence

Udo Broll and Kit-Pong Wong

No 355, Discussion Papers, Series II from University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy"

Abstract: The paper presents a model of a risk-averse exporting firm under exchange rate risk. We focus on the economic implications of basis risk. It is shown that the regression dependence assumptions between spot and futures exchange rates are essential in analyzing optimal hedging and export decisions. When the spot exchange rate and the futures exchange rate are imperfectly correlated we show that the firm adopts an over hedge when the exchange rate risk exposure is convex and an under hedge when the risk exposure is concave given the unbiasedness of the currency futures market.

Keywords: exchange rate risk; hedging; regression dependence (search for similar items in EconPapers)
JEL-codes: F21 F31 (search for similar items in EconPapers)
Date: 1997
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:kondp2:355

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