Electronic Resource
Oxford, UK
:
Blackwell Publishing Ltd
Journal of international financial management & accounting
5 (1994), S. 0
ISSN:
1467-646X
Source:
Blackwell Publishing Journal Backfiles 1879-2005
Topics:
Economics
Notes:
We study the firm's hedging problem when there is uncertainty about whether its bid on a foreign project will be accepted. Most treatments of this problem suggest that foreign currency options are the preferred hedging instrument. However, we show that when the uncertainty pertaining to the realization of the foreign cash flow is unrelated to the exchange rate, which typically will be the case, futures dominate options as hedge vehicles.Conversely, options hedging will be appropriate when the viability of the foreign project depends also on an exchange-rate contingency, as would be the case when the bidding firm can withdraw its bid if the foreign currency depreciates sufficiently.In many cases, both futures and options will form part of the best hedge position. The general principle in forming the hedge is that futures will best offset exchange-rate exposure the existence of which is not exchange-rate contingent. Options will best hedge any costs or revenues that might occur in a foreign currency depending on the outcome of an exchange-rate contingency.
Type of Medium:
Electronic Resource
URL:
http://dx.doi.org/10.1111/j.1467-646X.1994.tb00039.x
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