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Article: International trade and hedging under joint price and exchange rate uncertainty

TitleInternational trade and hedging under joint price and exchange rate uncertainty
Authors
KeywordsExchange Rate Risk
Hedging
Price Risk
Production
Issue Date2013
PublisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/iref
Citation
International Review Of Economics And Finance, 2013, v. 27, p. 160-170 How to Cite?
AbstractThis paper examines the behavior of a competitive exporting firm under joint price and exchange rate uncertainty. We show that the firm's optimal production and hedging decisions depend crucially on the degree of forward market incompleteness, and on the correlation structure of the price and exchange rate risk. The separation theorem holds if there are complete forward markets for hedging purposes. Should the forward markets be incomplete, the firm employs operational hedging by adjusting its output so as to better cope with the residual risk that is unhedgeable by simply trading the existing forward contracts. In the case that the price risk cannot be directly managed by financial hedging, we construct a reasonable example in which the firm optimally produces more, not less, than the benchmark output level under perfect hedging. Our results thus offer new insights into the interaction between financial and operational hedging in the context of multiple sources of uncertainty. © 2012 Elsevier Inc. All rights reserved.
Persistent Identifierhttp://hdl.handle.net/10722/177808
ISSN
2015 Impact Factor: 1.846
2015 SCImago Journal Rankings: 0.890

 

DC FieldValueLanguage
dc.contributor.authorWong, KPen_US
dc.date.accessioned2012-12-19T09:39:58Z-
dc.date.available2012-12-19T09:39:58Z-
dc.date.issued2013en_US
dc.identifier.citationInternational Review Of Economics And Finance, 2013, v. 27, p. 160-170en_US
dc.identifier.issn1059-0560en_US
dc.identifier.urihttp://hdl.handle.net/10722/177808-
dc.description.abstractThis paper examines the behavior of a competitive exporting firm under joint price and exchange rate uncertainty. We show that the firm's optimal production and hedging decisions depend crucially on the degree of forward market incompleteness, and on the correlation structure of the price and exchange rate risk. The separation theorem holds if there are complete forward markets for hedging purposes. Should the forward markets be incomplete, the firm employs operational hedging by adjusting its output so as to better cope with the residual risk that is unhedgeable by simply trading the existing forward contracts. In the case that the price risk cannot be directly managed by financial hedging, we construct a reasonable example in which the firm optimally produces more, not less, than the benchmark output level under perfect hedging. Our results thus offer new insights into the interaction between financial and operational hedging in the context of multiple sources of uncertainty. © 2012 Elsevier Inc. All rights reserved.en_US
dc.languageengen_US
dc.publisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/irefen_US
dc.relation.ispartofInternational Review of Economics and Financeen_US
dc.subjectExchange Rate Risken_US
dc.subjectHedgingen_US
dc.subjectPrice Risken_US
dc.subjectProductionen_US
dc.titleInternational trade and hedging under joint price and exchange rate uncertaintyen_US
dc.typeArticleen_US
dc.identifier.emailWong, KP: kpwongc@hkucc.hku.hken_US
dc.identifier.authorityWong, KP=rp01112en_US
dc.description.naturelink_to_subscribed_fulltexten_US
dc.identifier.doi10.1016/j.iref.2012.09.013en_US
dc.identifier.scopuseid_2-s2.0-84876307256en_US
dc.identifier.hkuros214058-
dc.publisher.placeNetherlandsen_US
dc.identifier.scopusauthoridWong, KP=7404759417en_US
dc.identifier.citeulike11661741-

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