Abstract
This note studies the optimal production and hedging decisions of a competitive international firm that exports to two foreign countries. The firm faces multiple sources of exchange rate uncertainty. Cross-hedging is plausible in that one of the two foreign countries has a currency forward market. We show that the firm's optimal forward position is an over-hedge, a full-hedge or an under-hedge, depending on whether the two random exchange rates are strongly positively correlated, uncorrelated or negatively correlated, respectively.
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