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Cross-Hedging of Exchange-Rate Risk

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  • Broll, Udo
  • Eckwert, Bernhard

Abstract

For currencies with highly developed forward markets a well-known separation theorem holds which implies that international firms fully hedge the exchange rate risk if the forward markets are unbiased. In this paper we present a model of a risk-averse firm when perfect hedging instruments are not available. Instead the firm can cross-hedge the exchange-rate risk by using the forward markets of a third country's currency. We demonstrate that the unbiasedness of all forward markets does not imply full hedge, although the firm has the option to hedge all the risks. Copyright 1996 by Blackwell Publishing Ltd.

Suggested Citation

  • Broll, Udo & Eckwert, Bernhard, 1996. "Cross-Hedging of Exchange-Rate Risk," Review of International Economics, Wiley Blackwell, vol. 4(3), pages 282-286, October.
    • Handle: RePEc:bla:reviec:v:4:y:1996:i:3:p:282-86
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    Cited by:

    1. Röthig, Andreas, 2008. "The Impact of Backwardation on Hedgers' Demand for Currency Futures Contracts: Theory versus Empirical Evidence," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 35698, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    2. Broll Udo, 1999. "Export as an Option," International Economic Journal, Taylor & Francis Journals, vol. 13(1), pages 19-26.
    3. Andreas Röthig, 2009. "Microeconomic Risk Management and Macroeconomic Stability," Lecture Notes in Economics and Mathematical Systems, Springer, number 978-3-642-01565-6, December.
    4. Broll, Udo & Eckwert, Bernhard, 1998. "Export and Hedging Decision with State-Dependent Utility," International Review of Economics & Finance, Elsevier, vol. 7(3), pages 247-253.
    5. Broll, Udo & Eckwert, Bernhard, 1996. "The equilibrium risk premium on the forward market for foreign currency," Discussion Papers, Series II 299, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    6. Björn Döhring, 2008. "Hedging and invoicing strategies to reduce exchange rate exposure - a euro-area perspective," European Economy - Economic Papers 2008 - 2015 299, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    7. Röthig, Andreas, 2008. "The impact of backwardation on hedgers' demand for currency futures contracts: theory versus empirical evidence," Darmstadt Discussion Papers in Economics 190, Darmstadt University of Technology, Department of Law and Economics.
    8. Broll, Udo & Wong, Kit Pong, 2011. "Cross-hedging of correlated exchange rates," Dresden Discussion Paper Series in Economics 04/11, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.

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