Abstract
A bargaining approach is followed to examine the operational hedging technique of currency collars. By working out the Nash equilibrium in a bargaining game involving two firms with different degrees of risk tolerance, some simulation results are presented to show the process determining the threshold of risk sharing. It is found that as long as one of the firms is more risk averse than the other, both firms gain from a currency collar. The simulation results also reveal that, for a given degree of risk aversion, the risk sharing threshold parameter increases with the standard deviation of the underlying exchange rate.
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