Hedging of exchange rate risk and regression dependence

Udo Broll; Kit Pong Wong

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.

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Year of publication:	1997
Authors:	Broll, Udo ; Kit, Pong Wong
Publisher:	Konstanz
Subject:	exchange rate risk \| hedging \| regression dependence \| Währungsmanagement \| Foreign exchange management \| Hedging \| Außenhandelssektor \| Foreign trade sector \| Devisenmarkt \| Foreign exchange market \| Währungsderivat \| Currency derivative \| Regressionsanalyse \| Regression analysis \| Theorie \| Theory