|
|
|
|
Title: |
Price Uncertainty, Future Markets and Correlation |
| Author: |
Battermann, Harald L. & Broll, Udo |
| Author
Affiliation: |
University of Saarland & Dresden University of Technology |
| Source: |
International Economic Journal, June 2004, v. 18, no. 2, pp. 237-244 |
|
Publication Date: |
June 2004 |
|
Abstract: |
This paper examines the optimal trade and hedging decisions of a competitive exporting firm which faces concurrently hedgeable exchange rate risk and non-hedgeable inflation risk. The macroeconomic interaction between exchange rate and domestic inflation rate risk is described by a state variable. The (strong) correlation is pivotal in determining the optimal risk management. it is shown how optimal hedgiing strategies are affected by state-dependent preferences of the firm. The optimal hedge policy is to minimize the variation of marginal utility of final wealth across states of nature instead of minimizing the variance of final wealth. |
|
