Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/213889
Authors: 
Entrop, Oliver
Fuchs, Fabian U.
Year of Publication: 
2020
Series/Report no.: 
Passauer Diskussionspapiere - Betriebswirtschaftliche Reihe No. B-40-20
Abstract: 
This paper analyzes optimal hedge ratios for foreign exchange (FX) rate risk of companies. Our contribution to the literature is twofold: (i) We present a theoretical two-period regret model that allows us to analyze the determinants of the optimal hedge ratio given the outcome of past hedging decisions and future expectations. The model implies that the optimal hedge ratio depends on the past hedge ratio, the past exchange rate return, the expected exchange rate return and the skewness of its distribution, its covariance to the foreign market return, as well as the company's risk and regret aversion. (ii) We test the related model-derived hypotheses on a broad sample of US non-financial companies over the period 1995 to 2015 and find strong evidence for the model's predictions. By adding a dynamic regret approach to the hedging and FX literature we shed further light on the rationale behind selective hedging.
Subjects: 
exchange rate exposure
regret aversion
hedging
risk aversion
derivatives
JEL: 
F31
G15
G32
G41
Document Type: 
Working Paper

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