Title

Hedging and nonlinear risk exposure

Document Type

Journal article

Source Publication

Oxford Economic Papers

Publication Date

1-1-2001

Volume

53

Issue

2

First Page

281

Last Page

296

Abstract

This paper documents some empirical evidence of nonlinear spot-futures exchange rates relationships and develops an expected utility model of an exporting firm to examine the associated economic implications. The model shows that the firm should export more (less) and adopt an over (under) hedge in an unbiased currency futures market if the spot-futures exchange rates relationship is convex (concave) rather than linear. When fairly priced currency options on futures are available, the firm should use them in conjunction with the currency futures so as to achieve better hedging against its nonlinear exchange rate risk exposure. This provides a rationale for the hedging role of options when the underlying uncertainty is nonlinear in nature.

DOI

10.1093/oep/53.2.281

Print ISSN

00307653

E-ISSN

14643812

Publisher Statement

Copyright © Oxford University Press 2001

Access to external full text or publisher's version may require subscription.

Full-text Version

Publisher’s Version

Recommended Citation

Broll, U., Chow, K. W., & Wong, K. P. (2001). Hedging and nonlinear risk exposure. Oxford Economic Papers, 53(2), 281-296. doi: 10.1093/oep/53.2.281