Exports and Indirect Hedging of Foreign Currency Risk

Abstract

We present a model of a risk-averse competitive exporting firm under exchange rate risk. Direct hedging instruments are not available. However, there are domestic assets whose prices are correlated to the foreign currency. We consider a market for futures contracts in these domestic assets and investigate the firm's indirect hedging and export policy. It is shown that the availability of many financial instruments correlated with foreign exchange may, under some circumstances, provide the same results as a perfect hedge. JEL Classification Numbers: F21, F31.