Restricted Export Flexibility and Risk Management with Options and Futures



Proposition 4 Suppose that the restricted export flexible firm can trade unbiased cur-
rency futures only. Then, its optimal futures position, H*, satisfies Pf Qf < H* <

Pf (q: - Qd).

Figure 4: Hedged and unhedged profits with futures only

Proposition 4 can be illustrated using Figure 4. Without hedging, the firm’s profits
are piecewise linear and convex in the exchange rate. However, currency futures only
allow for hedging against a linear exposure. For
S > Pd/Pf , the optimal export policy is
to export as much as possible which generates foreign currency revenue of
Pf (Q - Qd).
This is the steeper part of the unhedged profits line in the north-east of Figure 4. Setting
H = Pf(Q - Qd), the firm could eliminate exchange rate risk for high exchange rate
realizations,
S > Pd/Pf . For lower realizations, S < Pd/Pf , export revenue only amounts
to
PfQf . For these realizations, exchange rate risk can be eliminated by setting H =
PfQf . This shows that there is a conflict between hedging exchange rate risk for high
and for low realizations of the exchange rate. Proposition 4 states that the firm prefers a

17



More intriguing information

1. Regional dynamics in mountain areas and the need for integrated policies
2. Computational Batik Motif Generation Innovation of Traditi onal Heritage by Fracta l Computation
3. The name is absent
4. Menarchial Age of Secondary School Girls in Urban and Rural Areas of Rivers State, Nigeria
5. The name is absent
6. The name is absent
7. Hemmnisse für die Vernetzungen von Wissenschaft und Wirtschaft abbauen
8. Family, social security and social insurance: General remarks and the present discussion in Germany as a case study
9. Transport system as an element of sustainable economic growth in the tourist region
10. Palvelujen vienti ja kansainvälistyminen