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Title: |
Currency Hedging for Export-Flexible Firms |
| Author: |
Wong, Kit Pong |
| Author
Affiliation: |
U Hong Kong |
| Source: |
International Economic Journal, Spring 2001, v. 15, no. 1, pp. 165-174 |
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Publication Date: |
Spring 2001 |
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Abstract: |
This paper examines the production and
hedging decisions of a competitive exporting firm under exchange rate
uncertainty. The firm possesses export flexibility in that it can
distribute its output to either the domestic market or a foreign market,
after observing the true realization of the exchange rate. It is shown
that the separation theorem does not hold under export flexibility,
i.e., the firm's optimal output depends on the firm's preference and on
the underlying exchange rate uncertainty. Furthermore, the
export-flexible firm underhedges its exchange rate risk exposure in a
currency forward market wherein the forward exchange rate contains a
non-positive risk premium. |
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