Department of Business and Economics, School of International Studies (ZIS)Technische Universität Dresden
Kit Pong Wong
University of Hong Kong
Cite this article as:
Broll, U. & Wong, K.P. Int Econ Econ Policy (2015) 12: 509. doi:10.1007/s10368-014-0291-x
This paper examines the behavior of a competitive exporting firm that exports to two foreign countries under multiple sources of exchange rate uncertainty. The firm has to cross hedge its exchange rate risk exposure because there is only a forward market between the domestic currency and one foreign country’s currency. When the firm optimally exports to both foreign countries, we show that the firm’s production decision is independent of the firm’s risk attitude and of the underlying exchange rate uncertainty. We show further that the firm’s optimal forward position is depending on whether the two random exchange rates are correlated in the sense of expectation dependence. Our results refine the literature on cross-hedging by introducing the expectation dependence structure. The existing of risk-sharing institutions, such as forward markets, significantly modify the impact of uncertainty on international trade in the economy.