Risk Sharing Markets and International Trade – A Comment
"Optimal Hedging with Currency Forwards, Calls, and Calls on Forwards for the Competitive Exporting Firm Facing Exchange Rate Uncertainty", (extended version) Journal of Economics Vol. 59, No. 1, 1994, 51-70.
Yearbooks of Economics and Statistics (Jahrb. f. Nationalok. u. Stat.) Vol. 213/2, 1994, 230-238.
9 Pages Posted: 17 Jan 2014
Date Written: April 15, 1994
We consider an exporting firm facing FX risk. We show that FX options are not used for hedging, if there is no ex-post production flexibility. Hence, in the standard setting of having no ex-post optionality, hedging with forwards is the best choice.
The value of FX options for hedging arises as soon as there are real options for the exporter like determination of the importing country. It turns out that a risk averse firm will hedge fully by selling a certain portfolio of call options in the absence of speculative motives.
Keywords: corporate risk management, full hedge theorem, real options, ex-post production flexibility, foreign exchange risk
JEL Classification: D21, D92, F23, F31, F61, G15, G32, L1, M11, M16, M21
Suggested Citation: Suggested Citation