Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/50557 
Year of Publication: 
2011
Series/Report no.: 
Dresden Discussion Paper Series in Economics No. 04/11
Publisher: 
Technische Universität Dresden, Fakultät Wirtschaftswissenschaften, Dresden
Abstract: 
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.
Subjects: 
correlated exchange rates
cross-hedging
exports
production
JEL: 
D21
D24
D81
F31
Document Type: 
Working Paper

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