Hedging Multiple Price and Quantity Exposures

We examine the general hedging problem faced by a global portfolio manager or a pure exporting multinational firm. Most hedging models assume that these economic agents hold only a single asset in the spot market and are exposed only to a single source of price-quantity uncertainty. Such models are less relevant to many financial and exporting firms which face multiple sources of risk. In this paper we develop a general hedging model which explicitly recognizes that these hedgers are faced with multiple price and quantity uncertainties. Our model takes advantage of the full correlation structure of changes in spot prices, quantities and forward prices. We carry out simulations of the hedging model for a firm with two pairs of price and quantity exposures to demonstrate potential gains in hedging efficiency and effectiveness