Cross hedging in currency forward markets: A note

Бролл, Удо

doi:10.1002/(sici)1096-9934(199706)17:4<475::aid-fut5>3.0.co;2-e

Cited by 9 publications

(7 citation statements)

References 6 publications

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“…Even in the absence of such risk-sharing markets, reduction in foreign exchange exposure can be achieved via hedging activities of other currencies or financial assets which are highly correlated to the [NOVEMBER exchange rate (see e.g. Sercu and Uppal 1995;Broll et al 1995;Broll and Eckwert 1996;Broll 1997;Broll and Wahl 1998;Viaene and Zilcha 1998).…”

Section: Introductionmentioning

confidence: 99%

Multiple Currencies and Hedging

1999

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This paper presents a model of a competitive exporting firm confronting multiple currency risks. Future markets do not exist for the firm's own currency, but do exist between currencies of two countries to which the firm exports its entire output. We provide analytical insight into optimal cross-hedging and its implications on production and on trade flows. We show that the unbiasedness of the cross-currency futures market does not imply non-random profits. Furthermore, the availability of cross-hedging opportunities has no effects on production but does have effects on exports.

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Section: Introductionmentioning

confidence: 99%

Multiple Currencies and Hedging

1999

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“…Indeed, currency forward markets are typically absent in many less-developed countries, and are just starting to develop at a rather slow pace in many of the newly industrialized countries in Latin America and Asia Pacific (see Eiteman, Stonehill, & Moffett, 2009). 2 International firms that are exposed to currencies of these countries thus have to avail themselves of forward contracts on related currencies to cross hedge their exchange rate risk exposure (see, e.g., Adam-Müller & Nolte, 2011;Anderson & Danthine, 1981;Broll, 1997;Broll & Eckwert, 1996;Broll, Wong, & Zilcha, 1999;Battermann, Broll, & Wong, 2006;Chang & Wong, 2003;Eaker & Grant, 1987).…”

Section: Introductionmentioning

confidence: 99%

Cross Hedging with Currency Forward Contracts

Wong

2012

Journal of Futures Markets

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This study examines the behavior of a competitive exporting firm that exports to a foreign country and faces multiple sources of exchange rate uncertainty. Although there are no hedging instruments between the home and foreign currencies, there is a third country that has well‐developed currency forward markets to which the firm has access. The firm's optimal cross‐hedging decision is shown to depend both on the degree of incompleteness of the currency forward markets in the third country, and on the correlation structure of the random spot exchange rates. Furthermore, the firm is shown to be more eager to produce and expand its exports to the foreign country when the missing currency forward contracts between the home and foreign currencies can be synthesized by the existing currency forward contracts. In this case of perfect cross hedging, the separation theorem holds but the full‐hedging theorem may or may not hold. © 2012 Wiley Periodicals, Inc. Jrl Fut Mark

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“…1 International firms may as such have to avail themselves of forward contracts on related currencies to cross-hedge their exchange rate risk exposure (see, e.g., Anderson and Danthine, 1981;Eaker and Grant, 1987;Broll, 1997;Broll and Eckwert, 1999;Chang and Wong, 2003).…”

Section: Introductionmentioning

confidence: 99%

Cross-Hedging of Correlated Exchange Rates

Бролл¹,

Wong

2011

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. This paper examines the behavior of a competitive exporting firm that exports to two foreign countries under multiple sources of exchange rate uncertainty. The firm has to cross-hedge its exchange rate risk exposure because there is only a forward market between the domestic currency and one foreign country's currency. When the firm optimally exports to both foreign countries, we show that the firm's production decision is independent of the firm's risk attitude and of the underlying exchange rate uncertainty. We show further that the firm's optimal forward position is an over-hedge or an under-hedge, depending on whether the two random exchange rates are positively or negatively correlated in the sense of expectation dependence. Terms of use: Documents inJEL-Classification: D21; D24; D81; F31Keywords: Correlated exchange rates; Cross-hedging; Exports; Production Cross-Hedging of Correlated Exchange Rates AbstractThis paper examines the behavior of a competitive exporting firm that exports to two foreign countries under multiple sources of exchange rate uncertainty. The firm has to cross-hedge its exchange rate risk exposure because there is only a forward market between the domestic currency and one foreign country's currency. When the firm optimally exports to both foreign countries, we show that the firm's production decision is independent of the firm's risk attitude and of the underlying exchange rate uncertainty. We show further that the firm's optimal forward position is an overhedge or an under-hedge, depending on whether the two random exchange rates are positively or negatively correlated in the sense of expectation dependence.

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Cross hedging in currency forward markets: A note

Cited by 9 publications

References 6 publications

Multiple Currencies and Hedging

Multiple Currencies and Hedging

Cross Hedging with Currency Forward Contracts

Cross-Hedging of Correlated Exchange Rates

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