Firms engaged in international operations are highly interested in developing ways to protect themselves from exchange rate risk. The incentive for risk management comes from the enormous volatility of the floating foreign exchange rates.' Our study shows that an exporting firm can benefit from hedging exchange rate risks even when no perfect hedge is possible. Since in reality, not every currency is traded in a futures market [7, Chap. 15], the exporting firm uses futures contracts with other underlying assets whose spot prices are highly correlated with the foreign exchange spot rate. In the real world hedging must often be accomplished by using futures contracts on different deliverable instruments. Such hedging may result in imperfect hedging as shown by Anderson and Danthine [1], Eaker and Grant [11], Dellas and Zilberfarb [9], Broll, Wahl and Zilcha [6]. It has been shown in recent publications [12; 8; 15; 13; 23; 16; 2; 14; 5; 18; 22] that an international firm facing exchange rate risk can eliminate this risk altogether if it can use a currency forward market, another financial asset or a portfolio of assets which is perfectly correlated to the exchange rate. In the absence of such markets, the firm can reduce its income risk by engaging in a hedging activity of assets correlated to the foreign exchange. Recent studies of firm behavior under exchange rate uncertainty examine the influence of futures markets on the export and hedging decision. These papers derive two major theorems: One is the separation which states that, when futures markets exist, the firm's export production decision is determined solely by technology and input-output prices, including the futures prices. This result holds if the gain from the futures contract is perfectly correlated with export revenue. The other theorem is the full hedging which asserts that with unbiased futures markets, the firm completely avoids exchange rate risk by entering into optimum futures contracts.