CURRENCY HEDGING FOR EXPORT-FLEXIBLE FIRMS *

Author: WONG, KIT PONG

Source: International Economic Journal, Volume 15, Number 1, Number 1/Spring 2001 , pp. 165-174(10)

Publisher: Routledge, part of the Taylor & Francis Group

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Abstract:

This paper examines the production and hedging decisions of a competitive exporting firm under exchange rate uncertainty. The firm possesses export flexibility in that it can distribute its output to either the domestic market or a foreign market, after observing the true realization of the exchange rate. It is shown that the separation theorem does not hold under export flexibility, i.e., the firm's optimal output depends on the firm's preference and on the underlying exchange rate uncertainty. Furthermore, the export-flexible firm underhedges its exchange rate risk exposure in a currency forward market wherein the forward exchange rate contains a non-positive risk premium. [D21, F31]

Document Type: Research article

DOI: http://dx.doi.org/10.1080/10168730100080001

Affiliations: 1: University of Hong Kong

Publication date: 2001-03-01