Cross-Hedging of Exchange-Rate Risk |
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| Authors: | Udo Broll Bernhard Eckwert |
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| Institution: | Broll: University of Konstanz. Postfach 5560. D-78434 Konstanz. Germany. Tel: 7531-88-2557. Fax: 7531-88-4119. Email:;Eckwert: Univcrsity of Chemnitz. Reichenhainer Strasse 30, D-09107 Chemnitz. Germany. Tcl: 371-531-4231. Fax: 531-3970. Email: The authors wish to thank the referees for valuable commenmts |
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| Abstract: | For currencies with highly developed forward markets a well-known separation theorem holds which implies that international firms fully hedge the exchange rate risk if the forward markets are unbiased. In this paper we present a model of a risk-averse firm when perfect hedging instruments are not available. Instead the firm can cross-hedge the exchange-rate risk by using the forward markets of a third country's currency. We demonstrate that the unbiasedness of all forward markets does not imply full hedge, although the firm has the option to hedge all the risks. |
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