Discrete exchange rate hedging strategies

Abstract In this paper we compare the effect of alternative currency hedging strategies on the variance of the terminal value of the firm. The main focus is on the time at which the hedge is put down and the frequency with which it is adjusted. We show that commonly used strategies, such as one-period cash flow hedges and long-term fixed hedges may leave them firm very exposed to foreign exchange risk. One possible explanation for the popularity of one-period cash flow hedges is that the firm may shift its operations in response to an exchange rate change. We argue that the opportunity for such shifts may help to explain the use of short term hedges.

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