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
Language
English
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