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Hedging of exchange rate risk and regression dependence

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  • Broll, Udo
  • Wong, Kit-Pong

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.

Suggested Citation

  • Broll, Udo & Wong, Kit-Pong, 1997. "Hedging of exchange rate risk and regression dependence," Discussion Papers, Series II 355, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    • Handle: RePEc:zbw:kondp2:355
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    References listed on IDEAS

    as
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    18. Simon Benninga & Rafael Eldor & Itzhak Zilcha, 1984. "The optimal hedge ratio in unbiased futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 4(2), pages 155-159, June.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    exchange rate risk; hedging; regression dependence;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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