Hedging and nonlinear risk exposure

Udo BROLL, Kong Wing, Clement CHOW, Kit Pong WONG

Research output: Journal PublicationsJournal Article (refereed)peer-review

13 Citations (Scopus)


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.
Original languageEnglish
Pages (from-to)281-296
Number of pages16
JournalOxford Economic Papers
Issue number2
Publication statusPublished - Apr 2001

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