Multiple Currencies and Hedging

Abstract

This paper presents a model of a competitive exporting firm confronting multiple currency risks. Future markets do not exist for the firm’s own currency, but do exist between currencies of two countries to which the firm exports its entire output. We provide analytical insight into optimal cross‐hedging and its implications on production and on trade flows. We show that the unbiasedness of the cross‐currency futures market does not imply non‐random profits. Furthermore, the availability of cross‐hedging opportunities has no effects on production but does have effects on exports.

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